Patrick Van de Wille - IR Bill Merritt - President and CEO Rich Brezski - CFO.

Eric Wold - B. Riley Charlie Anderson - Dougherty & Company James Berkley - Barclays Matthew Galinko - Sidoti.

Good day, and welcome to the InterDigital Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Patrick Van de Wille. Please go ahead, sir..

Thank you very much. Good morning everyone, and welcome to InterDigital’s third quarter 2016 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 will offer some highlights about the quarter and the company and then 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, as well as those detailed in our Annual Report on Form 10-K for the year ended December 31, 2015 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 non-GAAP financial measures, such as free cash flow and pro forma operating expense.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our third quarter 2016 financial metrics tracker, which can be accessed on our homepage, www.interdigital.com, by clicking on the link on the left side of the homepage that says, Financial Metrics Tracker for Q3 2016.

With that, I will turn the call over to Bill..

Good morning everyone and thank you for joining us on the call today. As you saw from the press releases this morning the company delivered a spectacular quarter driven by our strong base of licensees and the successful conclusion of our licensing efforts with Huawei.

The strong results at our top line combined with continued efforts to control our costs, particularly around taxes and litigation resulted in a substantial increase in profitability both year over year and quarter over quarter. Rich will go through the numbers in more detail in his remarks.

I wanted to spend just a couple minutes today talking about the state of our Huawei’s terminal unit licensing business, our opportunities in IoT driven markets and overall how we see our entire business evolving. Our terminal unit licensing business is producing very strong returns on a consistent basis and those returns are driven by two factors.

First, we have a very strong base of licensees. These include Samsung, a significant portion of Apple sales via our Taiwan based licensees and Huawei, effectively the top three handset producers in the market today.

We also have a long tail of mid-size and small manufacturers under license and this coverage of manufacturers positions us strategically in relation to some new product launches, like the Google Pixel which is being produced by our long term licensee HTC.

This base of licensees helped drive our revenue for this quarter and will do so for a number of years going forward. The second thing you saw this quarter is the added value that comes with signing new licensees.

Of course, our new licensee will drive an increase in recurring revenue, how often more often than not the signing of a new licensee will also contribute additional revenue in the quarter the agreement is signed based upon certain sales made by that licensee prior to the signing of the license. We refer to this revenue as past sales revenue.

That component of our revenue has not been small. Indeed for the past four years, past sales have been a substantial driver of revenue for the company averaging over $100 million annually.

And while we talk about past sales as one-time event with respect to individual licensees, the fact is that our overall business may recur on a somewhat regular basis driven by different licensees.

The past sales opportunity is a unique characteristic of licensing businesses and one that we think will continue to be a nice value driver for us over the coming years. This belief is based on the fact that a number of companies that are not currently [indiscernible].

When we strike a license deal with these companies we would expect that each agreement would likely contribute both past sales and recurring revenue in the quarter the deal is signed in addition to contributing revenue – recurring revenues going forward. In sum, the core business remains very strong.

For that reason we continue to invest in exciting new technologies that we will deliver to our licensees. The main investment today is 5G which we talked about during our last call. Our engineering teams had a strong couple months in terms of contribution to the IT standard and we continue to expect we will have a strong position in 5G licensing.

Moving on IoT. During the quarter we did a number of things to begin to drive value from this new component of our business. First we became part of the Avanci licensing platform joining Ericsson, Qualcomm, ZTE and KPN.

As a preliminary matter, joining the initial members, Qualcomm and Ericsson at such an early stage reflects very well on how far we have come as a research and development based licensing company.

As for the platform itself, Avanci represents a new and innovative approach to licensing wireless connections, an approach that we think is particularly well suited to certain segments of the IoT environment where there will be both a huge need for innovation and a massive number of participants who will rely on that innovation for their products.

Providing the fragmented IoT ecosystem with a one stop solution may prove to be an effective and efficient way to help drive the enormous potential of the IoT driven markets. Avanci is led by a very strong management team, one we know very well and in whom we have great confidence to make the platform a success.

Avanci will focus initially on the smart meter and automotive markets. Interestingly these are effectively two new markets for us and it demonstrates one of the benefits of joining Avanci. Without Avanci we would have needed time to establish relationships and a market presence before seeing licensing success.

Avanci allows us to leverage the strength of all the participating companies many of which already have a presence in these markets and have the opportunity to derive success more quickly. In addition to joining of Avanci, we continue to invest in additional IoT opportunities for the company based on our oneMPOWER and wot.io software platforms.

You’ve likely read the steady stream of news coming from us in terms of our success in our trial deployment of these systems in the U.K. as part of the oneTRANSPORT project. We are encouraged by these results and are now working through our dedicated IoT business unit to drive revenue producing commercial relationships in the UK and around the world.

Our IoT work is also getting tremendous recognition. Next month we will be finalist at the World Communication Awards where our work is part of oneTRANSPORT and just yesterday our oneMPOWER and wot.io solutions were recognized with an award at the IOT Solutions World Congress in Barcelona.

These two IoT opportunities, one at the connection level and the second at the middleware level represent a strong value driver for the company.

As we discussed at our Investor Day in September we are estimating the annual revenue opportunities in the next five years to reach the $75 million to $100 million range with a substantial portion of that revenue dropping to the bottom line as we have only a small amount of incremental costs associated with these activities.

That means that – what might be a 20% increase on the revenue line can mean a significantly higher percentage increase on the profit line. That is a great opportunity to drive value for shareholders. It's worth noting that all the opportunity I discussed can be driven organically at the company.

However that does not mean that we do not see the opportunity for inorganic growth, we do, which is one of the reasons we have maintained a strong balance sheet. With our large installed base of handset customers, we see an opportunity to acquire additional pervasive technologies that we can offer to our licensee base at economical prices.

As licensing has become a business of scale, there are a number of small companies with terrific technology that simply do not have the financial strength to effectively deliver that technology across the handset ecosystem, we do.

We also see companies working on technology that can be standardized as they have the ability to effectively deliver the technology into the standards and have it adopted, we can do that. Finally, we also see companies with attractive but incomplete product solutions who would benefit from that offering being made more robust, we can do that as well.

As a result, more so than at any time in our history we see the opportunity to make value driving external investments. We intend to explore them but with the rigor and financial discipline that you have become used to seeing at the company, whether it is in effectively managing our expenses, buying back shares or returning capital to shareholders.

In sum, it’s a great time to be at InterDigital, we have done a very good job of building a very strong business. And there is more value to create. Be assured, we are determined to do so. With that, let me turn the call over to Rich..

Thanks, Bill. In the third quarter 2016 we reported recurring revenues of $84 million, representing a roughly $6 million increase from the third quarter 2015.

The increase was driven by the recognition of revenue from our license agreement with Huawei and achieved despite declines in revenue from our Taiwanese based licensees and the renewal of the fixed agreement in fourth quarter 2015 with a lower quarterly contribution that reflects lower volumes.

Our total revenue of $208 million included $124 million of past sales, including $121 million of past sales from Huawei. It's worth repeating Bill’s comments from our pressure release that this marks the third year in the last four that we have reported over $100 million in past sales revenue.

While I often emphasize the importance of recurring revenue, our strong track record of reporting past sales is consistent with what we've always maintained, that the value of a license is more important than the timing of it. Past sales, while episodic, are a hallmark of our continued efforts to grow our licensee base.

This is the first quarter that our results reflect a contribution from Huawei. And we believe our results show that we got the deal done on the right terms. You may have noticed that our pass sales came in toward the bottom end of the range that we guided to for the third quarter.

This is because we only recognized revenue related to the first half of the patents that were included in the consideration we received from Huawei.

We currently expect to recognize revenue related to the patents yet to be transferred after the transfer process is completed and the patent value is determinable, which we expect to occur by the end of second quarter 2017. At such time we expect to recognize both additional past sales and recurring revenue.

Our operating expenses dropped $1.2 million from the already low levels we reported in the second quarter. Driven by a reduction in enforcement and litigation costs. Third quarter pro forma operating expense remained low and year to date was down about 5% from the prior year.

We reported an effective tax rate for the third quarter of around 32.5%, consistent with the expectations I communicated on the call last quarter.

Our year to date effective tax rate remains even lower due to the discrete one-time benefit of approximately $23 million that we recognized last quarter in connection with our amendment of prior year tax returns. Looking forward to fourth quarter, we will issue our revenue guidance once we receive the order reports from our per unit licensees.

So all in all, an excellent quarter marked by revenues over $200 million, continued careful control of our expenses and ongoing efforts to grow our business going forward. With that, I'll turn it back over to Patrick..

Thanks very much, Rich. And Angela, if we can turn it over to questions. .

[Operator Instructions] Our first question comes from the line of Eric Wold of B. Riley. .

Thank you. Good morning. Rich, you mentioned in your comments about the past sales component coming in at the low end of the range because some of those patents have been transferred and you expect that in Q2 of next year when you recognize additional past sales as well as other recurring revenues to start at that point.

Kind of thinking back to this quarter, if I look at the numbers on a sequential basis Q2 to Q3 past sales – sorry, fixed fee revenues went up $16.6 million sequentially.

Should we assume that all of that comes from the Huawei agreement or was there anything else kind of added or dropping off in that next Q2 to Q3 time period and is that kind of the good run rate to use for fixed fee now until we get to Q2 of next year?.

Yes, that's a great question, Eric. If you look at our financial metrics, because Huawei was such a significant contributor of revenue, well over 10%. We disclosed that they represented 66% of our overall revenues for the quarter.

So when you look at the total revenue contributed and back off the past sales portion, you'll see that that's the driver there of the additional fixed fee revenue on the recurring side. .

So that's a good run rate to use for fixed fees in total with all your customers until we get to Q2 of next year at least unless something else happens in between. .

Yes, so with fixed fee, typically that relates to contracts where our licensee is paying a fixed amount, typically results [ph] in straight line amortization. So if you think about it on a go forward basis, that becomes the marker going forward.

As I mentioned there are additional patents that we expect to receive by the second quarter of 2017 and the revenue related to those would then be allocated and there'd be additional past sales revenue but also an elevation in the fixed fee run rate at that point. .

And then just final question, I know it's still so early since you finalized the Huawei agreement.

But can you talk about if that would generate any traction with the other China OEM discussions you've been having and any updates on those if you can say anything?.

I’d say that, as we expected, one of the things getting Huawei done is it provides some visibility for other folks into the financial terms that Huawei agreed to, it’s not perfect visibility but our disclosures give people a sense of where they are at, so that’s very helpful in discussions, I would say that we continue to have some good engagement in China [indiscernible] as I always say, continues to be a somewhat slow process over there but that's not surprising.

As long as it’s a slow process in the right direction, then that's fine. So I think the Huawei deal will contribute to movement over there and then I think we've got some other things to do with the company which we can do to continue that process. .

You next question will come from the line of Charlie Anderson of Dougherty & Company. .

Yeah, thanks for taking my questions.

Just so I understand this correctly the delta between where the guidance was on past sales and what you reported, is that effectively the number we need to be thinking about for next year? And is that number basically going to influence both past sales and recurring or is there some other number associated with the recurring that we need to be thinking about and what drives that number beyond just the past transfers and then cash or just past transfer?.

Yes, so as I mentioned, Charlie, the reason that we can’t recognize revenue at this point is that we made the determination that the value of the patents prior to the transfer is not determinable. That said [indiscernible] has accounting consequences.

But that is obviously tied to my discussion around being on the low end of the range for guidance and I will also highlight that we mentioned and disclosed in the 10-Q, that half the patents have been transferred – the value of half the patents that transferred to date was a little less than $8 million.

So while the second half is not a determinable from an accounting standpoint, you have a couple of guideposts there. .

And then I just want to make sure I heard this right that you will be getting royalties off of Pixel that [indiscernible] produces, so that’s great news.

And then Blackberry, the change in their business model, have you guys been able to determine how that impacts how royalties would flow to you?.

I don’t think we’ve made a specific determination yet, because I don’t think we know all the facts yet around that how they’ve made that change. So it was a fairly small contributor to our revenue in any event.

So we will see how it plays out over the next couple of months in terms of what they actually did and what the legal rights were, and how that may relate to the agreement we have with them..

Great. And then just last one for me. Bill, you mentioned in your script about inorganic growth and I remember there was a few comments you made about it at the Analyst Day. What's driving that sort of change in your tone? I don't think you really talked about inorganic growth in the past.

And what is sort of the capacity you guys have between what you have in cash, would you do anything with that if it was the right deal? Any other color there would be helpful. Thanks..

I will start with the second part. I mean I think the capacity at the company is significant, that doesn't necessarily mean you do a very large transaction and don't think capacity is the determining factor, we have the ability to do all sorts of things. If you think about it, it’s a very simple value equation right.

So if there's somebody out there that has the patent position with respect to some critical component of technology and devices which the critical components continue to grow, if that is housed within a somewhat smaller company that has a tough slog in terms of getting it licensed out for the industry.

We provide a great market channel for that technology to all of our licensees and if you think about just a small increment of royalties across our entire base that can be a huge amount of money for us.

So it doesn't -- the nice thing about acquisitions like that doesn't require us to change the way we go to market, it doesn't require a change in the business model. It's just getting us more assets agreeing to our licensees. So I think it's a nice – it’s a very nice way for us to create very significant value for shareholders.

As I mentioned we’re a pretty pragmatic bunch and I’d say we’re very disciplined in terms of how we deploy our cash. We're always going to do it in the way that drives the highest shareholder value, so we’ll keep that in mind as we move forward on that.

The other thing as I said it's not necessary to grow the business so but I think it's a good opportunity and one that we should explore both..

[Operator Instructions] We will go ahead with our next question from James Berkley of Barclays..

Just real quick, don't want to belabor this but want to make sure I fully understand.

Just the split – the split that we can bake into using the 66% number you gave, similar to what we should expect between past sales and then fixed recurring fees for 2Q, when that number comes out, can we think about it that way?.

Yeah, I don't think I would necessarily think about it along those terms. I'm trying to think if there's a way that I can answer your question, James. I think it’s – maybe you have to keep in mind that your past sales you're recognizing at this point but for that second patent transfer all of the past sales, okay.

Because typically this would be an unusual circumstance where we recognize past sales associated with signing an agreement at a point other than the quarter in which we signed the agreement. The only other times that happens typically will be when there is audit adjustments or things like that.

But in the current quarter you have recurring revenue, you’re not recognizing all the recurring revenue for the deal, you're just recognizing the recurring revenue that's associated with this quarter. So as a result, the ratio for the current quarter is skewed more towards past sales. .

And then just shifting, I know at your investor day and again you mentioned it today, you gave that five year guidance relating to oneTRANSPORT, MPOWER et cetera.

But would you able to give just a little bit more color on when you think you can start to monetize those opportunities even in a very small way? Obviously five years, you gave like the guide towards up to almost $100 million, I think it was but even like grabbing [ph] a couple million, what's the timing on that potentially?.

I think for both -- if you think of that again, there's two components of revenue on IoT. There's a connection based licensing, those are being done through Avanci and then there's the software middleware layer which is both patents and software, those are being done by us. I think Avanci continues to -- I think do very well.

I am very confident in that management team, I've known the leader of Avanci for many many years. And I think they want to get the revenue as quick as they can and so they're not making any projections but I think that I wouldn't be surprised if they can start to deliver something next year off that platform.

Again I think they want to get success pretty quick. So I think success by them will also draw more people into the platform which is going to be really good idea. On the software side, as I mentioned we are in deployment in the U.K. So we’ve got good -- sort of pre-commercial to the point we can point to.

The team is out with a number of channel partners working a couple segments at the IoT market – IoT driven market. So that we're certainly pushing them for revenue next year off of that business.

And so again I think you can say that that’s a fact, because we don’t know that yet, I think certainly next year is a point when we want to see I think two things.

One is to some extent it’s not the amount of revenue so much as the quality of the revenue that comes in, it’s revenue that comes in that we see being really scalable, because you are with a good channel partner who's going to get you into a lot of other accounts, that’s, even if it’s small at the beginning if you see it being able to grow rapidly that will be very encouraging.

So we've done on the other -- on the terminal licensing business we're going to do our best to provide people with guideposts along the way here so they can measure how we're doing because we do appreciate it’s a long term goal and you need some markers along the way. .

Appreciate that. That color was very helpful.

And just lastly here, on the recurring revenue piece you guys saw this quarter, is it fair to say that we can expect that to take up going forward in the next couple quarters, just given the iPhone launch, the opportunity that you mentioned with the Google Pixel and Huawei being onboard now?.

Well, certainly the pattern has been that Apple launches new iPhone late in the third quarter because Pegatron and other Taiwanese based licensees on a per unit basis, any supply for the iPhone that results in Q4 revenue for us, then in Q4 the underlying sales, first full quarter of iPhone sales, that becomes our revenue when it’s reported to us in the first quarter the following year.

So if you look over the last couple of years, from that ecosystem, our first quarter has been the strongest and our fourth quarter has been the second strongest by far. .

Your next question comes from the line of Matthew Galinko of Sidoti..

I guess, considering you have so many of the largest handset companies under license now, you talked a fair amount on the script about getting more of the past sales and setting some expectation that that will continue to be a material part of your results.

So I am just curious, how we should think about that given we take obviously a number of smaller OEMs coming on to contribute materially any given quarter now or a year, so I'm just hoping you could kind of color that in a little bit more given kind of maybe tougher hurdle to get a material contribution going forward?.

I think you've got a couple – you’ve got at least three manufacturers, actually four. That actually have material past sales, LG hasn’t been on their license for a number of years. ZTE, another one, Xiaomi is the third and Lenovo is the fourth. I think each of those actually has a pretty significant chunk of past sales associated with them.

And so it doesn't require us to license a whole bunch of small guys, actually just one or two of these is going to – we do a good component of that deal is going to be past sales revenues.

So I think that's why we [indiscernible] it could be a license contributor to revenue in the next number of years so long as we are successful to sign these folks up, we have -- we believe we will be. And so until we get the benefit of not only the recurring revenue from them on a go forward basis but the past sales contribution as well..

And then maybe one other in terms of your capital deployment and touching on potentially inorganic addition. I guess I am curious more your traditional R&D dollars I guess take a few years to become productive in terms of revenue and cash flow for years.

So I mean when you evaluate potential deals and the environment you're talking about today, what's your time to generate a return on those sorts of deals?.

I think it would depend -- if you kind of put the opportunities into two different buckets, that they have a slightly different type of insurance. So you have a bucket of opportunity out there which companies would establish portfolio with technologies are already or are beginning to be pervasive in the handset business.

And I think that those types of deals will very quickly contribute to value at the company because they can through their assets and an opportunity can be immediately exercised into licensing really a discussion we're having today. And those companies also would definitely come with revenue already.

And so between the two, I think those can be very creative deals with when you think about. There's a second bucket which would be investments in companies that are developing futures -- technology that is not yet pervasive. But we think it will be.

So I think that probably is a little bit more like our R&D but even there I think the time horizon is shorter because what you're picking up is someone who's already done a fair amount of development. And where there is already a spend that this is going to be -- could be pervasive.

So I think it would move more quickly than our R&D would move as quickly as the first category where it’s provisioning.

My sense on these types of acquisitions is there -- they would be that much lower cost because there's not a proven track record for the technology and this is typically not going to be revenue associated with those risen very small revenues as you would do so.

As I said I think if it's already proven and out there I think it's done correctly, it can immediately contribute.

If it's not yet proven it will be -- will need to do that and now will take some time but I think that will be faster than the internal R&D, internal R&D has its taste to find cases, it moves with the industry and as we've shown over the years, it ultimately does contribute a lot of value to the company..

Maybe just one last one along, along these lines but is there any -- considering those two buckets but as you look at those inorganic efforts particularly the last developed ones, the ones that are more in line with your R&D, is there thought to be bringing them under the standard contribution model or but just to primary way nonstandard driven?.

I think it can be either. I think the one of the real value add we would bring to you in any acquisition we want to make sure that whatever you acquire makes you much better at the end of the day or you make it much better than not it's not the ones making it and that is there's no reason to do the acquisition.

In the instance of a company who had a technology that there could be standardized but does not have experience in standby. That's a great value add that we bring to that company. The other day that we drive that technology and post the market in one fell swoop through the standards process.

So I think that certainly value could bring I think -- that doesn't mean there's not property non-standardized technology.

And I think that frankly gaining that keep building at the company would be great because that I think it develops our nonstandard technology vision and research strength could be a nice add into the research team that we have already. End of Q&A.

It appears there are no further questions at this time. Mr Van de Wille Vander, I'd like to turn the conference back to you for any additional or closing remarks..

Okay, thank you very much, Joe and thank you to everybody for joining our call today. We forward to reconnecting with you next quarter. Thanks again..

This concludes today’s call. Thank you your participation. You may now disconnect your lines and have a wonderful day..