William Merritt – President and Chief Executive Officer Richard Brezski – Chief Financial Officer Patrick Van de Wille - Vice President, Communications & Investor Relations.

Charlie Anderson – Dougherty & Co Tim Quillin – Stephens Inc. James Berkley – Barclays Capital.

Good day, and welcome to the InterDigital Second Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrick Van de Wille. Please go ahead, sir..

Thanks very much. Good morning, everyone, and welcome to InterDigital’s second quarter 2014 earnings conference call. With me this morning are Bill Merritt, our President and CEO; and Rich Brezski, our CFO. Consistent with last quarter’s call, we’ll offer some highlights about the quarter and our outlook, and then open the call up 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 results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our earnings release published this morning, and those detailed in our Annual Report on Form 10-K for the year ended December 31, 2013, 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. With that, let me turn the call over to Bill..

Good morning everyone. Thanks for joining us. As you saw in the release this morning, we delivered a spectacular quarter, with strong growth in revenue year-over-year. We also established a great baseline of revenue for coming quarters, with significant market opportunity remaining to drive to even higher revenue levels.

In short, an increase in topline, combined with the stable expense line delivering great profitability in cash flow and a significant part of the market remaining to be addressed. Our success drives off the continued strength of our core licensing business. Obviously we’re thrilled to renew the Samsung license during the second quarter.

That renewal draws both our quarterly recurring revenue as well as the past sales revenue for the quarter. Licensing Samsung should come as no surprise. Despite all the negative rhetoric in the market about patents and patent licensing, the fact is that good companies continue to sign licenses for valuable patent portfolios like ours.

Indeed, Samsung, the leading supplier of handsets in the mobile market, now has been a licensee of ours for nearly 20 years, which is great one and we have designed the new agreement to possibly take us nearly another 10 years. But the Samsung agreement was not the only big driver for us in the quarter.

We continued to see strong royalties from Pegatron as it continues to perform well as Apple’s number two supplier of iPhone products. Our agreement with Apple expired at the end of June, and we have continued to work to renew that agreement. We do not see that expiration as having any negative impact on our business.

Indeed, with reports of Apple further diversifying its supply chain to include Wistron, another licensee of ours, we can potentially see our revenue from Apple products increase before the end of this year even without a renewal with Apple itself.

That said, we continue to discuss the renewal of Apple and we’ll be open to a comprehensive, long-term relationship with them as well. The quarter also saw a continued revenue support from the rest of our terminal unit licensee base. In the quarter, we recognized royalties from over 25 licensees.

As always, we have some customers that are seeing challenges in their business, but others that continue to perform well. The diversity in our customer base provides us with substantial revenue stability, and of course the opportunity to license the remainder of the market provides the potential for significant revenue growth.

This quarter also marked the first quarter where we begin to see meaningful revenues from our infrastructure licensing initiatives. As you’ll recall, back in October of 2013, we formally launched an effort to license a significant portfolio of cellular infrastructure related patents. That initiative had two prongs.

The first prong was the launch of the Signal Trust for Wireless Innovation, a separate and independent licensing and monetization entity that would be dedicated to pursuing these meaningful initiatives.

This innovative structure allows us to maintain all the revenue upside from the focused and independent licensing and monetization efforts of the Signal Trust. As we mentioned before, the Trust structure is one we would consider for additional licensing opportunities. The second prong was our retention of licensing rights for a limited period.

This structure allowed us to encourage parties negotiating with us on infrastructure deals to move those deals to completion prior to us no longer having licensing rights under the patents transferred over to the Trust. That structure worked very well as we completed two license agreements encompassing rights under the patents transfer to the Trust.

Those deals covered just under 40% of the infrastructure market and contributed over $37 million in revenue in this quarter, inclusive of past sales and current patent royalties. We would also expect to see solid incremental revenues from those deals in the coming quarters as well.

The trust now has full responsibility for the infrastructure patents transferred to it, with a significant – very significant part of the market left to pursue.

The Trusts will be able to leverage the market validation for the licensees we have secured, both in terms of the need for a license under the Trust patents, and the value of the new licensees – new licensees have agreed to pay.

Indeed, the royalty range as we secured in our infrastructure licensing activities, are just a little lower than our historic rates on the terminal unit business. Equally important, the deals were also done without any need for litigation.

All these we believe gives the Trust a significant level of licensing strength going forward, and we wish the Trust great success. During the quarter, we also continued to move forward on our litigations. A quick snapshot of what is coming up is as follows. First will be the commission’s decision on whether to renew the 868 initial determination.

As we reported in mid-June, the ALJ sided with us on nearly every issue in the case, except a few claim constructions. We have petitioned the commission for a review of those claim constructions.

We continue to believe the ALJ erred on the key [things] as claim constructions in the case, particularly with regard to the power ramp-up patents, which have a long litigation history at this point. The commission is scheduled to decide on it before August 14, 2014 whether or not it will take up that review.

Second, we have two patent infringement trials scheduled in the fall of this year. First is against Microsoft and Nokia involving two patents, one LP related patent and a second patent related to dual-mode cellular Wi-Fi devices.

The second is a patent infringement case against ZTE involving the same LTE and Wi-Fi related patents as the Nokia case, as well as two of our power ramp-up patents.

Those trials could be important in that our success in having a jury determine that the LTE and power ramp-up patents to be valid and infringed could influence the ITC to reach a favorable decision as well. In the fall, we would also expect oral argument on our federal circuit appeal of the 800 investigation.

Like any federal circuit appeal, the timing for argument and decision is somewhat uncertain, but we would hope to have a final decision sometime in early 2015. Success on this appeal could be very important with regard to the 613 investigations, the 800 investigation and the 868 investigation.

Lastly, our arbitration with Huawei is moving forward and we expect an evidentiary hearing early in 2015. As is typical, we also have other arbitrations underway that if resolved favorable, could lead to additional revenue.

The takeaway from the litigation summary should not be that this is a long list that somehow clouds the business with uncertainty. That’s simply not the case. Yes, the result in any one case is uncertain. However, cases typically involve only a handful of patents and we have a portfolio of over 20,000 assets.

The various litigations do inform prospective licensees that InterDigital takes the protection of its intellectual properties very seriously. We also take the proper enforcements of our license agreements very seriously. So while we are viewed as having a very fair licensing program, we also have the reputation of being very firm when needed.

For that reason, almost regardless of the result in any one litigation, our licensing efforts move forward, a testament to the industry’s knowledge of the contributions we have made, and our diligence in protecting those inventions. So all in all on licensing, a very, very strong quarter.

Of course we continue to work on expanding the licensee base with discussions ongoing with all the large unlicensed terminal unit manufacturers. As of right now, we have baseline annual revenue of around $300 million with about 50% of the handset market under license, and less than 40% of the infrastructure market under license.

Assuming we get to somewhere between 85% and 95% penetration of these markets, we will always have some portion of the market unlicensed as contracts roll off. That would take us to between $500 million and $600 million in sustainable annual revenue.

Additionally, we also continue to have episodic revenue of significant amounts as past sales are collected, arbitrations are resolved favorably, and excess patents assets are sold. In fact in 2012, 2013 and so far in 2014, we’ve had episodic revenue of nearly $400 million, $120 million, and approximately $120 million respectively.

All of that adds up to an extremely attractive core business. Beyond licensing, we also see great opportunity to appropriately expand and diversify our revenue base in an economical and measured fashion.

Strategically, we are focusing on small, targeted initiatives in three areas where we have considerable expertise, internet of things, future networks, and media and content delivery. We think we have a great technology and capability to bring to all of these spaces.

Our approach to these initiatives is radically different than our existing core business approach. For example we officially launched our first internal startup WoT.io in June, focusing on the data side of the M2M or Internet of Things market.

While the initiative is built on InterDigital research, it has a new location, the Flatiron District in New York City, almost entirely new employees with experience with products and services and a compensation structure that’s relying heavily on the equity of the newly formed company as the primary compensation driver.

So if the employees of this internal startup build something of great value and they are off to a good start, they will be rewarded along, with our shareholders. We’re spending the summer evaluating some other exciting options that could potentially be drivers of future value.

In summary a really, really good quarter both financially and strategically. With that let me turn the call to Rich..

Thanks Bill. We reported recurring revenue of nearly $75 million in the quarter, representing a strong increase of over $30 million or about 70% over second quarter 2013.

The increase in our returning revenue, as well as strong past sales of nearly $120 million, resulted from the three agreements signed in the quarter, including our previously announced agreements with Samsung and Fujitsu.

We expect to release our guidance for third quarter in the next week or two, but I can tell you that we view $75 million as a reasonable recurring run rate to think about going forward.

Having said that, given the recent expiration of our license with Apple, the potential loss or deferral of revenue from one of our licensees that recently announced a debt workout, and slowing iPhone sales ahead of the anticipated launch of the iPhone 6 later this year, we currently believe Q3 recurring revenue could be down roughly $2 million to $4 million from the current quarter before recovering in Q4.

Of course this depends on a number of factors, including the timing of the next iPhone launch, the level to which our licensees participate within Apple’s supply chain, and the -potential to sign new license agreements. Our second quarter 2014 operating expenses of $65.9 million were up nearly $11 million from the prior year.

Let me explain this in more detail as there are a number of puts and takes worth noting. At a high level, our recent expense trend is driven by three areas. First, as we expected our litigation expense dropped considerably since last year. This is very good news.

It is always difficult to predict future levels of litigation expense, but as Bill mentioned, we expect to be pretty active in the second half of the year. So, we could see litigation expenses increase over second quarter levels.

That being said, we currently don’t expect them to reach the higher rates we experienced in 2013 and the first quarter of this year. Second, after excluding performance compensation, our overall R&D spending is pretty much in line with two and three years ago, but is up $1 million to $2 million per quarter from 2013 levels.

Over the last two to three years, we have significantly diversified and expanded our research and development capabilities. In that time, we have added external research capabilities through innovation partners. We have invested in technology development, including WoT.io, the M2M startup that Bill referred to earlier.

And we now deliver roughly $8 million to $10 million of technology services to our Convida joint venture each year.

While it is important that we have achieved this expansion of our capabilities without any significant long term increase in research and development spending, it is equally important that we have done so without impacting the level of innovation with our core licensing business.

Going forward, we are very focused on optimizing our spending between what’s needed to drive our core licensing business and other value creating opportunities like our investment in WoT.io. Maintaining overall technology development at a relatively flat level of expenditure is an important goal for the company.

Finally, the item that most impacted our operating expenses in the quarter was an increase in our performance compensation accruals. This increase was directly related to our success in signing three agreements in the quarter, including Samsung. These agreements materially increased our recurring revenue and added a substantial amount of past sales.

As we’ve previously disclosed, we have been accruing many of our long term compensation plans at low rates. Our success in the quarter resulted in two adjustments to our compensation accruals. One, to bring the current quarter up to the appropriate accrual rates. And a second, to catch up the prior quarters which had been accrued at lower rates.

Given the competitive market for our workforce, the overlapping plans we have running at any one time, and the long term nature of some of those plans, these catch-ups can be considerable when we sign significant license agreements such as Samsung. The catch-up we recorded this quarter was roughly $7 million.

The balance of the increase in compensation as compared to second quarter 2013, was driven by comparatively low rates in second quarter 2013.

As a reminder, back in June of 2013 we had not yet resolved the arbitrations with Apple and Intel, which along with the three agreements we signed this quarter, contributed to a 71% increase in recurring revenue and over $220 million in past sales over the intervening 12 month period.

Each of these key areas will remain important as we move forward, but I want to note that this quarter’s $7 million compensation catch-up is non-recurring in nature.

However, any sequential quarterly drop in this item will be partly offset by roughly $2 million of additional patent amortization resulting from the patents that we acquired in the quarter.

Moving on to taxes, as I first mentioned on last quarter’s call, our second quarter tax rate included a $2.5 million charge associated with a tax settlement we reached in April. The impact of this discrete item was muted by the high level of pretax income we reported in the quarter.

All of this resulted in earnings of $1.93 per share for the quarter and free cash flow of $23.7 million. In addition, we recorded a $270 million sequential increase in accounts receivable, which for us generally represents amounts due in the next 12 months.

Of this increase in accounts receivable, I can report that we’ve already collected $200 million since the June 30 balance sheet date. As a final note, we are pleased to provide an update on our initiatives to return value to shareholders as we outlined at the company’s annual meeting of shareholders in June.

In addition to doubling our regular quarterly dividend, as of this week we’ve bought back $30 million in shares of the company or 10% of the buyback program we announced in June.

We think the increase in the dividend and the aggressive stock repurchases highlight our confidence in the strength of the cash flows going forward, as well as our willingness to return value to shareholders. With that I’ll turn the call back over to Patrick. .

Thanks Rich. With that, I’d like to open the call for questions. .

(Operator Instructions) And we’ll take our first question from the site of Charlie Anderson with Dougherty & Co. Please go ahead. .

Great. Thank you for taking my questions. Rich, I wanted to ask you about the OpEx. So you are up I think $15 million sequentially if I exclude litigation.

How much of that is sustainably higher versus how much is a onetime effect based on some of the things that you did in the quarter?.

Sure. In answering that Charlie, let me highlight something for you in our financial metrics which we also posted this morning to help you and others gain an understanding of these kinds of trends.

We have always reported adjusted operating expense which adjusts our operating expense in any one period for items – onetime items such as repositionings, compensation accrual adjustments and the like. It also backs out pattern amortization, which is a non-cash item and intellectual property enforcement and litigation cost.

We now actually present that as pro forma operating expense and we just slightly adjusted the way we treat compensation to provide a better period to period comparison there. And you’ll see that over the last couple of quarters we’ve been running around $32.5 million based on that metric.

It was abnormally low in the first quarter of this year at about $30 million and then popped up to about $35 million. You can think of it as being maybe $2 million to $3 million above trend, which is attributable to the first research and development and some of the items I noted in my script.

And then I guess the rest would be a couple of different things, but basically as the patent portfolio grows we have maintenance fees that we have to file throughout the world. Those increase and that’s certainly a component of it as well. .

Perfect and then on the revenue item, like you said, you are 5.3 from the two new agreements recurring and then I think 17 from Samsung.

Are those partial quarters or is that locked in what we will be doing each quarter with those two amounts?.

Yeah. So, we are recognizing all of those agreements on a straight line basis. So what we typically do when we sign a fixed price deal recognized on a straight line basis, we’ll treat and categorize as recurring revenue, the full revenue for that quarter and any amounts from prior quarters would be reported in past sales. .

Got it and then you mentioned and it was in the Q as well that one of your licensees is going through the restructuring.

Did you recognize revenue from them in the quarter, is that just stop recognition in the quarter that we are in?.

We recognized some revenue from them in the quarter, but basically it was based on cash that we had already collected. So there were some, we were running -- the cash was running ahead of the revenue. At this point we’ve recognized revenue up to the cash collected.

But that did represent a decrease from prior quarters and I think I alluded to the fact that absent a change, either another payment or some positive development there, we would not have revenue from that licensee at all in the third quarter. .

Got you. And then last one for me, you mentioned the two new agreements are very nice new agreements, a bit customer like Ericson.

Were those signed after the initial determination in your recent case or before? And then also just qualitatively, how does the licensing pipeline look today both in infrastructure and in terminals?.

So, in terms of the timing of the sign, I won’t get into that, but I’d say the infrastructure patent portfolio is different in some respects from the portfolio or the pieces of the portfolio that were in the ITC litigation. So, one is not certainly going to drive the other in any event. The licensing pipeline for both sides I think is in good shape.

It's certainly on the terminal unit side. I think we’ve got some good wind in our back with Samsung being done. I think it provides a benchmark for folks and an additional validation of the portfolio. So Larry’s team is pretty busy out there with folks. We have some litigations coming up.

I think litigations always provide an opportunity for folks to sit down and chat about things, which is good. Again, litigation is really not – it's not a strategy of the company. It’s more a tool that we use for getting discussions going and driving deals. So we feel pretty good about the terminal unit pipeline.

On the infrastructure side, it's in the Trust’s hands now. I think we’ve turned it over in very good shape in terms of both really good assets and validation. It’s a smaller market so they don’t have as many targets to chase. But I think they’ve got – they’ve also got some good wind in their back right now. .

And we’ll take our next question from the side of Tim Quillin from Stephens Inc. Please go ahead..

Good morning. Nice quarter of course. On the fixed fee licensee that’s in poor financial shape, I guess first of all my assumption is we’re talking about Pantech and maybe you can confirm or deny that.

But is there a chance that as they get through their debt workout that they renew licensing or what's the fluidity of the situation there?.

Yes. Sure Tim. I don’t know that I can confirm or deny that it's Pantech, but certainly Pantech is a licensee of ours. With respect to – so I'll just answer the question with respect to the disclosure we made. The company is in a debt workout.

We’re at the moment kind of on a cash basis as a result of that because we can’t place reliance on future payments based on our understanding of the situation, which is somewhat limited. And if that outlook improves, certainly if they renew payments under the license agreement, then we’ll certainly renew recognizing revenue. .

Okay.

And was Pegatron at a similar level to 1Q revenue levels that they end up somewhere in that same ballpark?.

Yes. So I don’t think as a result of all the past sales revenue and the increase in recurring revenue that we reported in the quarter, I don’t believe that they were a 10% licensee in the quarter. But if you look on the financial metrics that I alluded to before, we do provide 10% for both the quarter and year-to-date. So that might be helpful to you..

Okay. Yeah, the year-to-date is great.

And on the Ericsson deal, what was the patent consideration? And did that include – was the patent consideration just for past sales or was that also in consideration of the ongoing royalties?.

Yes. So again I can’t really answer this question with respect to Ericsson. What I can refer you to is in our 10-Q we discuss that we did sign two agreements during the quarter. That included at least partial consideration in the form of patents, and/or a patent purchase agreement signed in connection with that agreement.

So I guess one of those agreements was infrastructure only. The other included both infrastructure and terminal units. And I think the total patent value that we received was about $64 million in aggregate.

During the quarter, revenue that we recognized from non-financial sources, which would include patents, was about 8% of our total revenue and that’s higher than we’d expect on a recurring basis because of the past sales. .

Okay. And then, I’m sorry I didn’t hear you.

Was it $64 million the consideration?.

$64 million total, yes..

64. Okay, very good. And then Rich, I was trying to -- and I think I probably can read the transcript and have a better idea, but I was trying to figure out how to model development costs on an ongoing basis in particular because it sounds like maybe they’re going to be a little bit higher than expected, but there were some unusuals in 2Q.

Can you just give us a sense of what 3Q might look like?.

I think one of the comments I provided in the script was that overall we’re looking for a relatively stable investment in research and development. There are always reasons that, that could change. So for instance, we right now have some funding from the Convida joint venture. Should we get additional funding from other parties that line can go up.

There’s always going to be some period to period ups and downs because quite frankly we manage the company based on making appropriate investments based on the returns that they’ll generate. But over the longer term we are looking to keep that in a relatively stable position..

Okay, and then just last question on cost. In terms of the patent administration and licensing, there’s a chunk of that that’s IP enforcement and a chunk of that that’s maybe more easier to control.

But how low -- if you get past this year and get some resolution on a couple of the outstanding issues that you have, how low could that line item go for you in 2015?.

So, I think the big variable there of course is the IP enforcement and we’ve talked about that probably on just about every call we’ve had. We noted in recent calls that we saw that coming down, and in fact it has. I think looking -- I know your comments focused on 2015, but we do expect to be busy in the second half of that year.

So we could see it perhaps creep up a little bit, not to where it was though. I think, sitting here today, it’s hard to really project out into 2015. But I certainly could see it at the levels we’re at in the second quarter, perhaps lower. But then again if we feel the need to enforce our portfolio it could go up..

(Operator instructions) and we’ll go next to the site of James Berkley from Barclays, please go ahead..

Thanks you for taking my questions. Just first I was wondering if you could provide some color around Pegatron, your expectations there given the much anticipated iPhone launch this fall. .

Yes, I think the big question is the timing. I think we’ve all read a number of rumors recently. So the impact on our financials during the balance of the year is going to largely depend on whether or not the launch takes place in the third quarter. We recognize revenue from Pegatron on a quarter lag.

So sales would have to occur in the third quarter to appear in our fourth quarter results. Last year there was a mid to late September launch, but as is the case with Apple, there’s typically a very big sales element in the first week or two. That drove some nice results for us in the fourth quarter of last year.

And then in the first quarter we had another good contribution from Pegatron because you had a full quarter’s worth of sales. So, should the launch timing be similar, then we look forward to that kind of impact.

I’ve read reports that with a larger form factor, there’s pretty good expectations for growth over what Apple experienced as a whole last year. And we’re anxious to see that develop and to see what Pegatron and other licensees’ participation in the [inaudible]. .

Great, thanks. And then I guess, if you just touch on Capital allocation, how you are thinking about that with the newly expanded repurchase program and increased dividend.

And just like looking at that combined with the large amount of cash you’ve kind of accumulated over the years relative to historical levels, how sustainable is the quarter to date activity that -- and I guess all the activity recently, the $30 million that we’ve seen over the last couple of months here?.

Yes. So the way I look at that is I’d start off again with recurring revenue. So as I mentioned on my prepared comments, we are around $75 million for the current quarter. And of course putting aside the ability to grow that and expand to the roughly half of the market that’s unlicensed, that suggests that going forward you can think about $75 million.

It’s going to move up and down and certainly following an iPhone launch it could move up. But that’s the starting point for any thoughts there. And as Bill mentioned, we have demonstrated some pretty good results in past sales over the last two or three years. So that’s always additive as well as new license agreements.

Combine that with expenses that should be relatively stable, but for litigation maybe moving around and we expected to be profitable. We expect to generate cash flow. And that was all part of the basis for our commitment to return capital to the shareholders in the form of the increased dividend and the $300 million buyback. .

All right, great, thanks. That’s really helpful. And I guess just lastly, if you could go into more detail regarding the compensation catch-up.

From what it sounds like it’s a onetime thing, but can we expect that to continue at any level as additional agreements are reached in the future?.

Yes. So basically what we’ve tried to do is articulate the difference between the recurring impact based on now being at higher accrual rates from the what I’m calling the nonrecurring impact where we’ve had prior quarters that were accrued at lower rates.

So you have to almost, the first thing you have to do is adjust your opening balance for the quarter so to speak. And that catch-up was $7 million. So absent significant new agreements, we’re probably – you can pull out that $7 million and have a pretty good idea of where we are at and where we’d expect to be in future quarters here.

But certainly if we had significant success and signed significant deals, you could see an increase then and another catch-up. .

And I would like to know turn the call back to Mr. Van de Wille, Please go ahead. Your line is open. .

Thanks very much. Before we close the call, a couple of points first.

In addition to today’s press release that as Rich mentioned, I’d like to invite investors to download our financial metrics tracker that providers a snapshot of key financial metrics tracked back nine quarters, which allows you to do a comparative examination of the similar quarter for three years.

You can access it on the homepage www.interdigital.com by clicking the link on the left side of the page that says view our financial metrics tracker. Finally, I’d like to close this call with the remainder that we’ve announced [inaudible] yesterday which will be held September 4th in New York City. We are proceeding with invitations.

So please feel free to contact me at the contact information listed in the investor section of our website. We’ll also be screening the event live and taking question from the online audience. And once again the information to access that stream will be available on our website as we [inaudible].

Thanks for joining us today and we hope to see you soon..

We’d like to thank everybody for their participation in today’s conference call. Please feel free to disconnect at any time..