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

James Robert Berkley - Barclays Capital, Inc..

Good day and welcome to the InterDigital Fourth 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..

Thank you very much, Lexie. Good morning, everyone, and welcome to InterDigital's fourth quarter and full year 2014 earnings conference call. With me this morning are Bill Merritt, our President and CEO; and Rich Brezski, our CFO. We'll offer some highlights about the quarter and year and our outlook, and then we'll open the call up for questions.

Before we begin our remarks, I need to remind you that in this call we will make 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 detailed in our Annual Report on Form 10-K for the year ended December 31, 2014 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 and pro forma operating expenses, which are non-GAAP financial measures.

Reconciliations of free cash flow to net cash used in operating activities and pro forma operating expenses to operating expenses, the most directly comparable GAAP financial measures, are included in our fourth quarter financial metrics tracker, which can be accessed on our homepage, www.interdigital.com, by clicking the link on the left side of the homepage that says, "view our financial metrics tracker." With that, let me turn the call over to Bill..

2014 was another strong year for us doing what we typically do, creating new solutions to drive the next-generation of wireless services. This year also saw us create new ways to monetize our research beyond just patent licensing.

In terms of driving the licensing pipeline, our R&D teams did excellent work creating the innovations that are expected to drive many aspects of 5G networks.

Our 5G work included millimeter wave research, device-device technologies, advanced waveform research, and also a central place in the expert discussions that are working to define exactly how 5G will operate.

While the work occurred across all of our six development sites, we were particularly pleased that our new R&D center in London had a strong year building partnerships and contributing expertise to key 5G initiatives being driven out of Europe.

Our 5G development also paved the way for a new technology, a world's first, that we'll be announcing and demonstrating at the Mobile World Congress and that will target shorter term commercial possibilities.

We also continued our leadership role in the oneM2M initiative, conducting live demonstrations in South Korea and Europe during the course of the year as the oneM2M standard worked its way towards its first official release.

We continue to believe that a substantial portion of future Internet of Things connections will be made through a standardized platform that simplifies deployment and management.

We are very well positioned to benefit from that standards-based approach through our long-standing IOT research, as well as the efforts of our Convida joint venture with Sony, which just celebrated its second very strong year. Our R&D wings also continued the spread through our partners group, which explored technology in new areas for the company.

At year end, we had relationships in place with three research institutes, over a dozen relationships with prolific inventors, and company-specific R&D relationships.

Those relationships delivered a significant number of new inventions to the company in areas that complement our traditional R&D focus, such as augmented reality, security, haptics and other areas. This mix of invented activities drove one of our richest years in terms of depth, breadth and in variety of the innovations.

As I mentioned, we also moved forward going new means to monetize investment and research beyond just patent licensing. Earlier this year, we launched wot.io, a new start-up focused on establishing a data service exchange for the reams of data that will be produced from the broad range of IOT connections.

We did so in a very smart way using a new cost-effective performance based compensation structure, driven entirely off the success of the start-up.

Following its launch in 2014, wot.io had a great six months, building their business, driving relationships with key partners in the IoT ecosystem, and positioning themselves as thought leaders in the data domain that will be revolutionized by IoT. We expect even greater success from them in 2015.

Following that, at Mobile World Congress, we will showcase a second start-up initiative, XL Air (11:14). The start-up is offering a cloud-based solution for the management of small cells from any vendor regardless of the air interface.

XL Air (11:23) leverages substantial research done by the company over the past decade on interference and capacity management, so it begins with a strong head start.

One of the advantages of these commercial initiatives have over other start-ups is that they begin their life with a strong, tested technology base and an existing high level engineering team. XL Air (11:44) will also employ the same incentive-based compensation structure as WoT.

Together, these two initiatives provide a foothold in markets that we believe are not only currently attractive but also represent significant growth markets as we move towards 5G. In sum, a remarkable year for us, setting the stage for what we hope to be an encore in 2015. With that, let me turn things over to Rich..

Thanks, Bill. As Bill noted, we had a great year, and we are very happy to see our efforts reflected in the strong financial performance for the company in 2014 as well as the momentum we see going into 2015. Over the last few quarters, you've heard me referring to recurring revenues on a more frequent basis.

Recently, I have also begun to highlight pro forma operating expenses. I'd like to focus for a moment on these two metrics and the relationship between them. Recurring revenue is comprised of current patent licensing royalties and current technology solutions revenue, in other words, revenue that relates to the current quarter.

For fixed-fee royalties, recurring revenue means the accounting allocation of fixed-fee payments to that particular quarter. For per unit royalties, it means the royalties reported to us in that quarter, which drive our guidance and are typically related to product sales by our licensees from the immediately preceding quarter.

Recurring revenue does not include past sales where what we referred to as past sales, which is revenue related to prior periods.

Two of the most prominent examples of past sales are when we received compensation for past infringement from a new licensee during a quarter or when we favorably resolve a licensee audit or benefit from some other type of reward during the quarter.

The bottom line is that recurring revenue enables us to gauge the size and success of our licensing program as a whole and provides the platform from which we can build future revenue growth by adding new licensing agreements. We started 2014 with $56 million of recurring revenue in Q1.

After we signed new agreements in the second quarter, including Samsung, our recurring revenue increased to $75 million. At that time, I began to discuss $300 million as a reasonable annualized recurring run rate to think about on a go-forward basis.

Today, we reported that our recurring revenue grew to $85 million in the fourth quarter, a $340 million yearly run rate, driving $288 million of recurring revenue in 2014. More importantly, we expect that growth to continue in Q1 with expected recurring revenue of $107 million to $110 million.

The expected sequential quarterly increase is based on the same set of licensees we had in fourth quarter 2014 and results in part from second half 2014 product introductions.

While we acknowledge that product introductions can have a cyclical effect on results, we take both the fourth quarter results and first quarter expectations as a strong signal that our recurring base of revenue has increased. We look forward to providing more details when we report our final results for first quarter of 2015.

Pro forma operating expense is a non-GAAP financial metric that we track, and you can see the details and reconciliation for that metric on our financial metrics tracker, which you can access on our website. This metric enables us to analyze our expenditures on a more meaningful quarter-to-quarter basis.

Pro forma operating expenses were relatively flat in the fourth quarter as compared to the third. For the year, our pro forma operating expenses were $137 million, up about 7% from the prior year. Of this increase, about $4.5 million related to commercial initiatives and our Signal Trust, which proved to be strong investments.

Bill mentioned the success wot.io is seeing and we completed two license agreements earlier in 2014 encompassing rights under the patents transferred to the trust. Of greatest interest to me is the change in the relationship between our pro forma operating expenses and recurring revenue over the last year.

In 2013, our pro forma operating expenses represented 65% of recurring revenue. In 2014, we reduced that ratio to 48% of recurring revenue.

Our business has outstanding leverage, and with very little variable cost, we believe we can continue to drive down this ratio through future revenue growth while maintaining our strong commitment to research and development.

As a final point, I'd like to acknowledge that activity under our repurchase authorization has slowed after repurchasing over $150 million or half the June authorization by the end of 2014. As I've said before, we generally take a longer-term view towards share repurchases, and we don't get too hung up on activity in any one period.

As our first quarter guidance indicates, we believe there is great potential to grow the business, and we remain confident in our ability to execute on that goal. With that, let me turn the call over to Patrick..

Thank you, Rich. Now, we'll take some questions from the folks on the call. So, Lexie, if you could open the line for questions please..

And we'll take our first question from Darrin Peller with Barclays..

Hi. Thanks, guys, for taking my question. This is James Berkley stepping in for Darrin here. I guess, I'll just start real quick on ZTE. I believe there were five patents involved in the appeal, four of which would aid cell phones using less power than they otherwise would, and one that allows a device to use various networks to transfer data.

That data related patent, as I understand it, was declared invalid.

Could you comment on that, and why that patent was called out specifically as well as how important it was relative to your ZTE opportunity, and how we should think about your approach to ZTE going forward?.

So, you're right, there was a number of patents involved in the appeal. But that said, they still represent a very, very small number of the patents that the company holds, and they were, for example, different than the patents that are being used in the Delaware litigation, the active litigation against ZTE.

So, while the decision itself was disappointing and, we think, pretty flawed, as we mentioned yesterday in the release, we don't think that the decision is controlling with respect to the other active litigations we have going on against ZTE or controlling as to the Microsoft 613 investigation..

Okay, great, thanks.

Turning to Pegatron real quick, is it fair to assume that the current agreement stands as is until the challenge by Pegatron reaches a resolution, or would Pegatron potentially try and withhold payment until that time? We can assume that that revenue stream is safe, correct?.

Yeah. So, James, what I can tell you is, typically one of the conditions for us recognizing revenue is looking at the considerations around collection. So if we generally aren't collecting the money, we'll typically defer. That's a bit of a generalization, I think that's probably valid here..

Okay, thanks. And then just lastly, when thinking about the $340 million number recurring revenue you spoke to, previously, you were at $300 million and talking about a $600 million opportunity.

Given some of the licensing arrangements in there, how should we think about the $600 million number now? And then if you could just speak to, obviously, your guidance was very strong for the first quarter.

How should we think about that recurring revenue number for 2015 as well?.

So, in terms of the target, the goal for the company in terms of its revenue off the licensing business, we talked about $500 million to $600 million. I think we're still comfortable with that range, and obviously the performance we're seeing now off the licensing business makes us even more comfortable with respect to achieving those numbers.

So, we got – we still have some work to do and sign up some new folks, but as we mentioned in the script, a really strong year last year, very good positioning this year, so we're definitely on track, as far as management is concerned towards that opportunity.

On terms, I think Rich mentioned in the script in terms of Q1, obviously there were some product introductions that drove that Q1 guidance. So – and I think there's a lot of information in the market and people can probably kind of figure out pretty well what those introductions were and how they could relate to our sales.

So, Q1 obviously is very strong, but I wouldn't necessarily take Q1 as the baseline for the remainder of the year..

Okay, that's fair.

I guess just lastly, would you potentially be able to breakout that $40 million incremental increase, and like how, just like you could provide any color on what drove that from the $300 million to $340 million?.

Yeah. I think I provided about as much color as I can. Well, the $300 million to $340 million, in that case, you're talking about Q2 to Q4. So what I can do there is refer you to the financial metrics where we track our revenue concentrations greater than 10%.

And you can see, if you look at the contributions that participants made in that category, you can get a sense for it. As for comparing that to our Q1 guidance, we typically don't provide any more detail than we already have at this stage..

All right, guys. Thanks a lot. I'll turn it over..

Thank you..

Thanks..

Thanks very much, sir..

And it appears we have no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks..

Well, thank you very much, Lexie, and thanks everybody for joining the call today. Not too many questions, but I'll take it as satisfaction that we've had a good quarter and a good year. Thanks for joining and we'll talk to you soon..

And this concludes today's conference. We thank you for your participation..