Patrick Van de Wille - Chief Communications Officer Bill Merritt - President, Chief Executive Officer, Director Rich Brezski - Chief Financial Officer, Treasurer.

Eric Wold - B Riley Charlie Anderson - Dougherty & Company Matthew Galinko - Sidoti Nikhil Dixit - Barclays.

Good day and welcome to the InterDigital first quarter 2017 earnings call. Please note that 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..

Hi. Thank you Amelia and good morning everybody. Welcome to InterDigital's first quarter 2017 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 insights 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, 2016 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, pro forma operating expenses, non-GAAP net income and non-GAAP diluted EPS.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our first quarter 2017 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 Q1 2017.

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

Yes. Thank you Patrick and good morning everyone and thank you for joining us on the call today. As you saw from the press release this morning, the company delivered a very solid quarter driven by our strong base of licensees that includes the three top sellers of smartphones, Apple, Samsung and Huawei.

The strong results on our topline combined with the continued efforts to control our costs resulted in substantial profitability. We also ended the quarter with a very strong balance sheet that provides us with significant opportunity to grow the business in a smart way. Rich will go through the numbers in more detail in his remarks.

I wanted to spend just a couple minutes today talking about the status of our licensing activities, where we are on 5G research, how the IoT opportunity is shaping up and our continuing thoughts around M&A. On the licensing front, we have an active dialogue ongoing with the remaining key unlicensed companies, including LG, Lenovo, ZTE and Xaiomi.

We remain patient in our approach, understanding that each of these customers faces different challenges within their respective businesses.

So talk to our customers about a wide range of options including the transfer of patents, joint research and access to our technology platform in the light of some of the discussions greatly enhanced by our acquisition of Hillcrest Labs.

That said, we and they also understand the potential for litigation in our industry in situations where the discussions do not get to where they need to be. In this regard, we are buoyed by recent decision in the U.K. on how to apply FRAND principles.

The decision involve Huawei and Unwired Planet with one of the issues being, under what conditions an injunction should issue for the infringement of standards-essential patents.

While like any decisions, there are parts we may relive and other parts we may not, overall there are many favorable aspects to that decision and in particular as to how the court handled the question I just mentioned.

In a nutshell, the court determined this case, a case which involves standards-essential patents that were found to be valid and infringed, that an injunction should be granted.

Importantly, the judge considered that the manufacturer should have agreed to take a worldwide license to the patent holders standards-essential patents and that the manufacturer's insistence on a U.K. only portfolio license was not FRAND. This is a very important conclusion.

In reaching this decision, the judge recognized that requiring the patent holder to bring suit in jurisdiction after jurisdiction was fundamentally unfair to the patent holder.

Indeed, the original patent holder, the innovator had willingly offered its technology solutions to the standard body which operates on worldwide basis to enable manufacturers of sell phones on a worldwide basis.

The technology assets substantially lowered the barrier for entry for new market participants allowing them to rapidly enter the market and grow market share. Indeed, that is the beauty of the worldwide standards process. It opens up the worldwide market to a large number of competitors to the benefit of manufacturers and consumers.

Given the benefits that accrue to manufacturers and the consumers alike, it only follows that the innovators who enable this market be treated fairly requiring that the manufacturer implementing such a standards take a license on a worldwide basis to access this important and exciting technology is a very logical and fair result.

While this is a lower court decision, it is nonetheless very meaningful and represents, I believe, the pendulum is beginning to swing back to the middle on patent licensing. It puts unwilling licensees on notice that patent holders may now have an effective and efficient means by which to secure worldwide licenses with manufactures on fair terms.

This is an extremely important development and consider this as an encouragement to unlicensed companies to negotiate the terms of a license on worldwide basis versus running the risk of a court setting the rate for them. I would say, don't construe that the suggesting court proceedings are more necessary.

To the contrary, the fact that courts can be effective in bringing closure to licensing issues on fair and balance terms can actually have the opposite effect. It may make both parties act more reasonably, avoid litigation and fashion their own result. Moving on to our 5G research efforts.

We continue to play a very important role in the development of this new very crucial standard. As we have discussed before, the 5G standard as a development will not only supercharge the services we get on the current devices, it will enable brand-new services from massive machine communication to mission-critical services like autonomous vehicles.

It is a very exciting development effort and InterDigital was in the thick of it. InterDigital's leadership is reflected in the fact that we have over a dozen key leadership positions within the standards bodies working on 5g design.

We were also one of four companies that were asked to present our 5G technology at the headline demo event on the main stage at the Mobile World Congress in Barcelona, the most important annual tradeshow for the industry.

We also demonstrated a host of 5G related technologies in our booth at the show and hosted a significant number of visitors who sought us out and we continue to be one of the few companies with its design proposals for a new radio, critical for 5G being actively considered for inclusion at the standard.

As for the IoT opportunity we are pursuing, we continue to build our brand, channel partners and sales pipeline. Through smart meter applications, we are now partners with CA, a leading technology solutions provider for the utility market to bring our IoT platform to the smart meter world. We have partnered with Harman for smart buildings.

And we continue to have our direct customer connection with Sony and others. These efforts continue to be supported by the recognition that our offerings are receiving the marketplace in terms of nominations, awards and wins on funded research out of the U.K.

We continue to be optimistic that we will see quality revenue from the business this year that while small on the outset, could ramp overtime in a meaningful way.

As previously discussed at our Investor Day in September 2016, we estimated that in five years the revenue from this opportunity combined with the revenue we expect from the Avanci IoT licensing platform could be in the $75 million to $100 million range with a substantial portion of that revenue dropping to the bottomline as we have only a small amount of incremental cost associated with these activities.

Lastly, we continue to be very focused on exploring the opportunity inorganic growth, which is one reason why 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.

We also believe that licensing businesses benefit from scale generally. As a result, more so than any time in our history, we see the opportunity to make value driving external investments. We intend to explore them but with a rigor and financial discipline that you have become use to seeing with the company.

In summary, we have done a great job of building a very strong business that we love and there is more value to create. Be assured that we are determined to do so. With that, let me turn the call over to Rich..

Thanks Bill. As Bill discussed, the addition of our recent license agreements with Huawei and Apple provide us with a stable platform to pursue further growth. That stability is reflected in the overall shift in the proportion of fixed fee versus per unit revenues over the last 12 months.

In first quarter 2016, per unit royalties accounted for 72% of our current patent royalty revenue with the remaining 28% coming from fixed fee agreements. In first quarter 2017, that ratio has inverted with 82% of our current patent royalty revenue coming from fixed fee agreements and per unit royalties contributing just 18%.

This year-over-year shift in revenue mix also reflects the seasonality that used to exist in our business related to the Apple supply chain. Up until this year, our first quarter revenue was impacted by Apple's calendar fourth quarter sales, traditionally the first full quarter of sales following the annual iPhone launch.

Per unit contributions from the Apple ecosystem would then trend down over our second and third quarters. Now with Apple under a fixed fee agreement, we expect regular revenue contributions from Apple based on straight-line revenue recognition under that fixed fee agreement.

Our pro forma operating expenses for the quarter were up a little bit on a year-over-year basis. This increase was expected due to our December 2016 acquisition of Hillcrest Labs. Of note, we recognized a tax benefit of $11.8 million in the first quarter associated with the vesting of share-based compensation.

This benefit reflects the increase in the value of share-based compensation at best, which is the basis for tax reduction as compared to the value at grant which is the basis for our book expense.

Prior to January of this year, such differences were reported as an adjustment to equity, but as a result of our adoption of new accounting standards that became effective this year, such changes now run through the P&L when the underlying shares vest.

During the quarter, we recognized about $1 million of share-based compensation expense associated with a fourth quarter 2016 retention grant to Hillcrest employees. The expense of this grant is recognized on an accelerated basis and like all share-based compensation, we exclude it from our non-GAAP diluted EPS in our financial metrics.

We also recognized about $1 million of amortization expense related to intangible assets we acquired from Hillcrest with most of that value being associated with patents covering Hillcrest sensor fusion and innovations. We have not excluded any acquisition related amortization from our non-GAAP diluted EPS.

We know that this practice is a bit different from our peers and is an outgrowth of our accounting policy to capitalize the cost associated with filing patents. With that, I will turn it back over to Patrick..

Thanks you very much, Rich.

Amelia, will you open the call for questions please?.

[Operator Instructions]. And we will go first to Eric Wold from B Riley. Please go ahead..

Thank you. Good morning guys. A few questions, I guess two quick housekeeping ones first.

I guess one, anything unusual in the Q1 operating expenses post Hillcrest? Anything unusual in there either direction? Or what we see in Q1 is that a relatively good run rate for the remainder of the year, I guess, assuming normal trends?.

Yes. Eric, I don't think there is anything highly unusual in there. That said, our level of investment is going to fluctuate a little bit quarter-to-quarter. You know that we are not intently focused on quarterly results, but making long-term investments that drive value. So we want to make sure that we manage our expenses.

I guess we did have the tradeshow in Barcelona. So that does tend to add to first quarter expenses. The only other thing that I notice, the benefit rate is little bit higher in the beginning of the year and trends down. But they are the normal seasonal things that we see every first quarter..

Okay.

And is the thought still that you will be able to recognize the remaining past sales payment from Huawei in Q2?.

Yes. That's right. That's all based on the timing of the final patent transfer from Huawei and that's anticipated to be in the second quarter..

Okay. And then kind of a larger question.

Update us, now that you have had Hillcrest Labs now for a few months and maybe kind of dig a little deeper, maybe talk about what's transpired into the combining efforts between the two teams, discussions with their customers about potentially going deeper with technologies? And then also, as you look at some of the other areas they were in, that InterDigital had not been in before, any of those seem increasingly the more attractive now to maybe go a little deeper and later than they previously thought?.

Sure. So I would sort of break it into three pieces, right. So there is the Hillcrest organic brand that they were operating on. So they continue to have solid customer discussions. They have got engagements with LG, Samsung and others on that. So that process continues. The second piece is where that process intersects with our customer base.

So for the reasons that, the other reason we acquired it, is in addition to having their own set of customers, some of their customers overlap with ours and it gives us a broader set of tools when we are talking with some of the unlicensed parties in terms of other things that we can do together.

And that has been a very productive dialogue going on with folks in terms of trying to create a more bundled solution. And then the third piece is, when you mention it, it's now talking about where the two organizations can go to get together, particularly from a technology development standpoint.

Sensors and sensor fusion is a very critical part of the go forward technology landscape. There is a lot of intersection with wireless and all that.

And so we are involved in a strategic planning process with them now to come up with the next great thing that Hillcrest can do leveraging its capabilities, but also integrating our strengths into that as well. So, so far it's doing exactly what we want it to do. So we hope that to be the continuing process with them..

Perfect. And then just a final question for me.

As you continue to progress towards 5G, remind us which, if you can't names of a customer, what percentage of customers or licensees, if any, really have any consideration for 5G in their agreements, even though they are not generating now, they kind of contemplation in agreements for when 5G comes out? Or is that all incremental down the road to those discussions?.

I would say, for the most part it's not in agreement today. Obviously a 5G device would be backwards compatible to 2G and 3G and 4G and so if it's been running well, for example, you would still get royalties on that product even though the product itself may not be fully licensed at that point.

But I think in some of the longer-term agreements we will need to address 5G in some respects.

And so I think my guess is, as we look at agreements that we would do this year and next year, 5G is going to become more of, it would like the prior generations of technology start to bleed into agreements on a more consistent basis given that the launch of 5G services is not too far out..

Perfect. Thank you guys..

[Operator Instructions]. We will go next to Charlie Anderson from Dougherty & Company. Please go ahead..

Yes. Good morning and thanks for taking my questions. Bill, I noted in the script for you named a few unlicensed OEMs. I don't know if I remember you do in the past, maybe LG, I wonder if that was because you maybe at a more advanced stage than you have been previously.

And then, what you see as the triggers there? I know you mentioned, everyone sort of has a different roadmap and different opportunities. Any additional color on that would be great? And then I have got a follow-up..

Sure. So no particular reason I put it in the script. Other than that, I think it is something we have said before. We think about the rest of the market to license, it's not hundred companies, right. It's a relatively small number of companies that we have got to focus on. So I think that's a positive.

I do think that each one presents a different set of facts that we need to deal with. And so while there are some aspects of resolution of one that could bleed into the other as well as some aspects of the resolution of Huawei and Apple that bleed into all. We do need to and we always are very flexible in terms of how we approach the licensees.

And the other part of my discussion was around the U.K. case. And as I said that, I think that if you think about licensing and needing to be a strong group, a mash group made up of a bunch of individual twines, right. And since the twines are how strong is your portfolio, how strong is your research or the tools you have.

I think one of the twines need to be an effective enforcement system. And I think that we are seeing more positive developments on that front.

And I think the result of that is actually less enforcement at the end of the day because people start to view that as sort of an unnecessary exercise because if it's going to end up with a fair and balanced result at the end of the day, people would rather negotiate that themselves. So we hope that that will be the effect that the U.K.

decision, you can be assured that that's something we chat about now with all of our licensees in terms of an alternative and perhaps not a preferred alternative to just working it out on our own..

Great. And then as it relates to IoT, you mentioned a trickle of revenue this year. Is that a reference to something coming in from Avanci or your own efforts? And then just generally, any color on how Avanci is going so far? Thanks..

So it will be both. Certainly the way Avanci is structured, when that begins to flow, I think it is certainly that it would be of that quality revenue that I talked about and I think it's also a very scalable. We continue to be encouraged by the level of activity that they are having and the quality of the discussions that they are having.

They don't have perfect visibility of everything they are doing since they are an independent group, but I know they are presently doing well and we chat on a regular basis. I am very comfortable with what they are doing. Another component would be our own activity and that would be on the software side.

And the expectation there is, things will come in through the channel partners that we have, whether it's CA or Harman. We may have a little bit of direct customer involvement as well. Again the metric there is, what we are looking for is customer engagement and that we see as scaling over time.

And certainly, those are the opportunities that are on the table right now. We just have to see if we can close on those..

Great. Actually just one more quick one. Big jump in the AR balance. I wonder when you see that converting into cash? Thanks..

Yes. So Charlie, our policy is to recognize receivables as they cross the 12 months from being due. So basically anything that's sitting in accounts receivables, it's all current and due within 12 months..

Okay. Great. Thanks very much..

And we will go next to Matthew Galinko from Sidoti. Please go ahead..

Hi. Good morning gentlemen.

First question would be, can you flesh out a little bit more the mechanics from your view of why players would behave a little more rationally if courts are more accommodative to patent holders? I guess I kind of understand that if you are licensing FRAND, but in so far as a portion of your portfolio doesn't fit in that structure, so just maybe broadly and then more specifically to you, how do the mechanics work in your view?.

It's a good question.

So as you think about what InterDigital has been talking about an d what we have actually been doing from a licensing perspective, our position over the last number of years has been pretty straightforward, which is either you can choose to negotiate a license agreement directly with us or if we cannot come to a fair result that everyone likes, then we re more than happy to alter the terms of that license and have somebody else determine what a fair value would be.

With the key part of that being, it needs to be worldwide, the license. I think for a while, we were sort of a lone voice out there on this. Oddly, it seemed to me to be the most rational way to approach this issue which is, we enable worldwide competition, manufactures benefit on a worldwide basis.

We willingly give our technology to use on a worldwide basis, so why shouldn't the resolution be on a worldwide basis. But recognizing that it may not be on terms that we or shouldn't be in terms that we dictate, it still will be on terms that are fair and if we can't come up with things that are fair on a bilateral negotiation, let's arbitrate.

I think what I liked about the U.K. decision is it was essentially a validation of that, not so much the arbitration piece, but the worldwide nature of things and as long as you have offered fair rate, you should be entitled to an injunction.

So the reason I think that that now will be very helpful in license negotiation is that becomes the backstop of a negotiation which is, if you don't want to agree to what we are putting forth, we can either go to arbitration or if you want we could go to the U.K. and get resolved there. And that path has already been cut.

And over the years, I found that, as I said, once you have an effective enforcement theme out there, folks are not really inclined to get down that path and we don't want to go down that path. We would rather negotiate on fair terms. And so I think certainly for the FRAND related patents, it balances the risk, levels the playing field.

I think that's enough metaphors. And then I think it provides an environment for a more arm's-length negotiation. Your second question is, what about non-FRAND related patents.

To some extent, at leas the way we approach the world, it may not be different in the sense that you may not have the same FRAN D overlay on top of those patents, but I don't think that immediately takes you to and therefore you can charge an unreasonable amount of money for that. At least that's not where we take off.

So I think you may have less regulatory ratable wall to get the same result, which is look, if you want a license and you want to agree to our terms, fine. Or if you want a license and you want to arbitrate, our team will be do that too but if you don't want to either of those, then we should be able to stop your shipments. That only fair..

Got it. I appreciate it..

And we will go next to Darrin Peller from Barclays..

Hi guys. This is Nikhil Dixit, on for Darrin. Thanks for taking the question. I am jumping on a little late, so I apologize if this has been covered already. But on the technology solutions front, I was curious as to the uptick in revenues there in the quarter. This is kind of like the second time we have seen that in.

Is it driven by similar factors to what you called out last quarter? And how should we think about the sustainability of that going forward?.

Yes. So Nikhil, that is driven by royalties we collect under a protocol stack agreement that's been in place for some time and really on a go forward basis it's going to be driven by underlying sales. In addition, we had Hillcrest onboard first quarter this year, well since that the very end of December.

So it really wasn't much of an impact at all in the fourth quarter but it is additive to that line in the current quarter..

Got it. Understood. And then on OpEx going forward, it seems like expense leverage at least, came in pretty strong in the quarter.

What are some of the kind of initiatives you are enacting there? And how should we think about expense growth going forward?.

Yes. I wouldn't say that there is any initiatives. There is no signs on the walls or anything like that. It's really just that the same kind of expense management that we have been applying over the years here.

The belief is that we make a very strong investment in research and development and that's been continuous over the years and we want to make sure that we are not over spending in other areas, only enough to make sure that we cannot harvest the fruits of that investment..

Got it. Makes sense. Thanks for the color guys..

With no further questions in the queue, I would like to turn it back over to you gentlemen for any additional or closing remarks..

Thank you Amelia. Thank you everybody for joining us today. Looking forward to talking to you next quarter. Thanks very much..

Ladies and gentlemen, that does conclude our conference for today. Thank you so much for your participation. You may now disconnect..