All right, perfect. Thank you all for joining us. Liren, thank you so much for being here. Liren is the CEO of InterDigital.
Thank you.
Appreciate you taking the time.
Yep.
Before we get started, I have a few disclosures. My name is Arjun Bhatia. I'm the research analyst here at William Blair, who covers InterDigital. For a complete list of our disclosures, please go to williamblair.com. All right. With that, let's go ahead and get started. Liren, again, thank you so much. I think you have a very fascinating story, a strong history of execution, and innovation, I would say, over the last at least five years that I've been covering you.
Thank you.
I think you're going to give a brief background on the business and talk high level, and then we can get into some Q&A. With that, I will hand it off to you.
Absolutely. Let me stand up here. We have a few slides here. I'll just go there. Before I trip over here. My name is Liren. Liren Chen. President and CEO for InterDigital. I have roughly half a dozen slides. I'll try to go over as quickly as I can, and then we'll take a bunch of questions. Okay? All right. Disclaimers, who we are, right? This is a one-pager summary of our company. We're a R&D company. We work on wireless, AI, and video codec. We try to solve the most difficult problems, and we build a patent portfolio. IP is our product. We license them to some of the largest vendors in the world, which I'll show to you.
Once we collect the money from licensing, we put it back into R&D, and we create the next generation codec and wireless technology and AI technology. That's only half the story. The other half, which I'll explain to the next section, is our go-to-market strategy. I joined the company five years ago. Before that, I spent 25 years at Qualcomm, which is well known for R&D research in wireless, video, and AI. Okay? Very proud of what we are able to accomplish financially, but I'll go through the rest of the summary. This is one pager for our business model. I already explained the top level. Focus on R&D, building patent portfolio, licensing them. How do we make sure our patents are being used? How do we make sure our technology in billions and billions of devices? The secret lies in our leadership in standard.
Standard is super important. Standard is everywhere. Standard what give you the interoperability and compatibility. Standard is what allows an iPhone to be able to talk to Android devices, but that's just one example. Okay? We participate and lead in standard. By leading the standard, we are able to set the table, we are able to have a better chance of our technology become part of the open standard. When people building product and services according to the standard, they are infringing our patent, and they need a license for our IP. Okay, that's essentially the two cycles of innovation here. As I mentioned earlier, we focus on the most difficult problem in wireless system. Wireless, I mean primarily cellular wireless, but we also are leading innovator in Wi-Fi and other wireless technology. In cellular, that's 3G, 4G, 5G, and going forward, that'd be 6G.
In video codec, that's the algorithm. Frankly, the innovation we built end to end allows you to compress video signal 1,000 times to 1, so you can send them with high quality, without disruption, with the quality and frankly, latency that people expect. Increasingly, we are driving AI innovation. AI, it's really two sides of the AI research. We are applying AI to solve wireless and video problems that's built in native support for wireless system, but we are also re-architecting wireless and video system to use AI as a use case. We are shaping the traffic differently as we architect machine codec that's separate from human codec. Combined, we are one of the very few companies in the world that's able to drive three different research and solving the best problem as we can. As I mentioned earlier, patent is our product.
We do not make physical product. We don't make software or chips or devices, but we build the foundational technology that people need to build on top of it. We measure our progress by IP, by patent portfolio in general. We have one of the largest and most valuable patent portfolio in the world. When I joined the company a few years ago, we have less than 20,000 assets. End of last year, we have 38,000 patents, and every single day, we get seven new patent granted to us every single day on average, that including weekends. As of now, we have more than 40,000 assets already, and it's growing, and growing at increasing speed. This is the one chart I call four panel chart.
What we do is we try to drive revenue coming both recurring revenue as well catch-up payment, and we deploy capital aggressively in share buybacks, and we increase dividend. By deploying share buyback, we are able to meaningfully reducing our shares outstanding, and by doing so, we are able to grow EPS and also adjusted EBITDA faster than we are able to grow our revenue. Okay? There's two more chart here. This is the progress we have made since I joined the company. I joined the company five years ago, coming from Qualcomm for 25 years. Since then, we have licensed and renewed contract with some of the largest vendors in the world. I'm talking about Apple, Samsung, Lenovo, and you name it.
We have signed more than 50 agreement combined of $4.7 billion in contract license, and some of those contracts are long-term contract, for example, our smartphone licensing program, we currently license Apple, Samsung, Xiaomi, which is number one, number two, number three smartphone vendors, all the way to end of this decade. By having this long-term agreement give us a lot of stability, give us foreseeability of the business, and enable us to add on top of it as revenue grows over time. I promise you, this is the last slide. This has laid out our long-term growth strategy all the way to 2030. Our bread and butter is smartphone licensing, and our midterm target is $500 million. We are actually achieving target ahead of schedule. As of this year, we are already at $490 million. This is all recurring revenue alone.
We are growing that with renewals, with next generation technology. We are also growing other devices. Other devices, I mean TVs, laptops, connected cars. Basically, anything that's wirelessly connected, anything that has a camera, has a display that capture and display videos, are almost by definition using our technology. That's not all. Our future for the company is in the cloud side, because we innovate at system level end to end. Our technology apply on the device side, but it also equally apply to the cloud space. By cloud, I mean the streaming services, the work product, the entertainment, the gamings, sports, all kind of different use case. We believe the cloud will give us a next generation growth for the company for the next decade and beyond.
Our revenue target for the cloud side is $300 million plus by 2030, and we are achieving our goal. We are making good progress. That's my summary presentation, and now over to Arjun.
Yeah. If you want to take a seat. I think the smartphones is your biggest market right now.
Yes.
You talked about you have Apple, Samsung, Xiaomi, the top three. Over the last several years, you've gotten a lot of the Chinese OEMs, Oppo, Vivo, so on, to sign on as well. I always think of InterDigital as a growth business, but you have, I think, almost 80% market share in the smartphone side. How does the smartphone business keep growing over the coming years? Because you've kind of already done so well there. What are the growth vectors left there still?
Very proud of what we are able to achieve. Our foundational technology driven by wireless Wi-Fi video codec applies to the smartphone industry. When I joined the company roughly five years ago, we had roughly 50% coverage of the device sold on the market under license. Keeping in mind that 100% of the device sold on the market using our technology, our technology part of the standard. Through hard work, through negotiations, everything here, we are currently licensed eight of the top 10 vendors. About 85% of the market under license. When I joined the company, our recurrent revenue piece for the smartphone piece is about $300 million. Now we are at $490 million, and midterm is $500 million and more. The way I see the smartphone growth is driven by three factors.
The number one factor was try to license a vendor who have been using our technology, who have been not paying us. Adding them is the number one goal, which we have done a good job. We have added, frankly, half a dozen vendors. Pretty much all the major vendor are licensed. That's first thing. The second order of business is growing those account over time. We do license our customers, generally speaking, through a long-term contract, roughly five years. Every five years, we will be renegotiating. If the vendor has gained market share, they have increased their volume, then in the next contract, we will negotiate proportionate to how much they have been selling on the device going forward. That's the second piece, if they gain volume. The third one is really we are also increasing IP content per device.
If you think about it, 3G, 4G, 5G, going forward will be 6G. We are also adding more advanced codec. We're adding AI features to the phone. In terms of valuation per device, we are able to demonstrate over time how our applied IP to the device at per device level is going up. Those are the three factors. If you look at the first factor, it's really a addition, increasing from 50% to 85%. The second and the third one are multiplications. If the vendor has gained volume, and then the revenue per device should go up. By multiplying those two things here, we are able to sustain and growing our revenue in the smartphone space.
Okay. What are your contracts? You said typically five years.
Yes.
What is the negotiation or the back and forth look like when you're doing a renewal with someone big? You're able to bring up all these factors of, look, we've grown our patent portfolio. We're covering more in your devices. How does that typically go?
Yes. In the smartphone space, most our contract, once we sign them up, are renewal. Renewal, generally speaking, is a little bit more straightforward than signing someone up for the first time, which we are able to do. During renewal, we would always present to them all the growth we have done in terms of our innovation since the last time they signed the contract. That can be three years ago, that can be five years ago. For some of the larger customer, that can be even longer.
We will demonstrate the data we have created and going forward how they're enabling. Those contract negotiations are, frankly, very sophisticated. It sometimes take multiple months and sometimes takes close to a year. We generally started from a year before the expiration of the current contract to negotiate. For someone, if they have never licensed with us, we will also negotiate for their past infringement, what we call catch-up payment. Keep in mind, our technology part of the open standard they have been building on very often for multiple years, sometimes even longer. Some of the larger vendors have been selling infringing devices by very large volume. Sometimes it can be hundreds of millions of devices. We have demonstrated our ability to collect for the past sales, and that sometimes add up to be fairly large amount.
During the five years I've been at InterDigital, we have collected, I think, over $1 billion in past sales of the past infringement of our IP. We try to do both.
Okay. I think that part is important just because as folks might look at your financial model, there might be sort of spikes in revenue, that is this catch-up payment that you're talking about. Is there a typical in terms of period of time that you go back five years, you go back seven years? How far back do you try to negotiate?
Legally speaking, there have been case laws in different countries that you can all the way back to the beginning of their infringement.
That's legally speaking. That so-called under FRAND principle. FRAND means Fair Reasonable Non-Discriminatory. In reality, we are building recurring long-lasting customer relationship. Some of those long-term customers, frankly, having practical reasons in terms of their financial accruals, in terms of how much they have set aside. We are demonstrating certain amount of flexibility. We have to strike a fairly careful balance because if we are being too flexible on the past sales, you actually create an incentive for people to keep on dragging along. In our industry, it's called holdout. We have to be able to be disciplined about collecting for past sales, yet considering the financial/business reality for the other party. We are striking that balance and try to find a fair settlement for both parties.
Okay. The next sort of big opportunity, at least in smartphones, is going to be 6G?
That is right.
How do you ensure that you are playing as important or more important a role in 6G innovation and the technologies that make up that standard relative to what you did in 5G and 4G before it? What does the R&D engine look like? What is your role on the standards bodies? How does that all come together to put you in a good position for this cycle?
I've been in the industry for 30-plus years. I joined Qualcomm when it was 2G, right in the middle of '90s. In our industry, roughly speaking, every 10 years, there's an evolution, what I call the N to N+1 G. The wireless industry, every generation technology exactly build on top of the previous one, they added more. That's by design. It allows the wireless carrier in particular to get the return for their investment, both CapEx aspects, allow the technology to be deployed seamlessly because every new generation technology cannot be deployed overnight. You also want a new feature adding in because you want to entice consumers to keep on upgrading their devices or services over time. It's carefully designed, every generation build on top of each other, adding new features.
InterDigital has been wireless innovator since 1970s, believe it or not. We were involved in building every generation of wireless technology. Right now, our engineers are pretty much 100% dedicated to work on 6G. 6G standard, it's scheduled to be finalized by 2029, with large commercial deployment roughly by 2030. What give me confidence is driving from several factor. One is you have to make sure you have the best engineers working on foundational technology. We are not working on superficial stuff. We try to solve the most difficult problem in the system. Why? Because that's what allows us to create IP on top of it. We solve the most difficult problem that has never, ever been solved before. In order to do so, you need to have the best engineers working on real difficult problems. That's a starting point.
Second thing is we send our engineer to work in the Standards Development Organizations for decades now. Our engineers are widely respected. They have spent decades building their company and their personal reputation in those what we call SDOs, Standards Development Organizations. Over time, we have built an impeccable reputation that our peer company recognize. I'll give you one data point. As of today, 3GPP, which is the organization defining 5G and 6G, have 15 different working groups. We have 5. InterDigital have two chairs in the 15 chair. Keep in mind, there's hundreds of company try to get involved. Everyone wanted to be the industry leadership role. We are the only company in the U.S. having multiple chairs. Only one. Worldwide, there's only three companies having more than one chair.
We are one of the three and one of the only US company leading those definitions. By leading the standard creation, we have a better chance of demonstrating our technology, introducing our proposals, and by the way, have the companies, our peers, our technology is superior. By superior, I mean faster, more reliable, lower latency, all the rest of stuff. We invest a lot in our IP. The other really interesting part is when we license, at least on the device side, the device are multi-mode. That's when I raise my phone to say, "This is a 5G phone," but Raiford have my phone, so I can't really raise it. That's a 5G phone. That 5G phone, at the same time, supports 3G and 4G. That's important.
By the time we're licensing 6G by end of the decade, we'll see this is a 6G phone, but it supports 4G and 5G at the same time. Why that's important? The vendor has been paying certain amount of valuation for the 4G, 5G technology. Now I'm adding on top of it. I can demonstrate to you are using more. That just for the wireless piece. Keep in mind, we also innovating in Wi-Fi. We are also innovating in AI. We innovate in the video codec, which video codec itself have this multiple generation adding on top of it at the same time. We are able to consistently demonstrating my customers getting more every generation. That's important aspects of our business.
Very interesting. Then maybe let's switch gears a bit to sort of this new TAM you're going after, which is the streaming market. You touched on it a little bit as a part of this broader cloud opportunity, but you're starting in streaming with sort of the video streaming players. Where are we in that opportunity? I think you have litigation ongoing with Disney and Amazon. Talk a little bit about where that litigation is and when investors should think revenue might flow in this market.
Yeah. First of all, I want to explain why do we deserve to be paid, right? We are innovating at system level end-to-end. If you look at how you are building and consuming content, the decoding side is happening on the device. The encoding side happen in the cloud. Think about you're watching a Netflix streaming, you're watching Disney+ or Hulu's. Why not? There's enormous amount of benefit to the cloud streaming provider. Our technology, combined with other people's contribution, allow the content to be compressed 1,000 times to one. Literally 1,000 times to one. That generate enormous amount of savings and that generate additional revenue opportunity for those vendors. They can sell HD content for more fees. They can give you real-time live sports and entertainment that otherwise a less advanced codec is not able to do.
If you look at the overall market, the streaming video on-demand market, both the advertisement-based as well as the subscription-based, as of today, is already the same size or bigger than the smartphone in terms of annual sales, which we consider that's our TAM. Roughly $500 billion per year in revenue, it's growing at much faster speed and have a higher margin than the smartphone industry. We actually believe our foundational technology, the importance to the streaming industry is just as much as the contribution I made to the cellular industry. We know it's a brand new program. We know it's going to take longer to launch. Our target for revenue in that industry is $300 million or more by 2030, even though we already achieved close to $500 million now to the smartphone industry. We want to give ourself a bit longer runway.
We want to set a little bit lower target, but we are also recognizing that industry will become even bigger and bigger and better. Therefore, we launched that program, frankly, a year and a half ago. Our R&D goes back to decades. Our patent portfolio is built over this foundational R&D over decades. We have been negotiating with Disney, frankly, for a while, for multiple years before we launched the enforcement. Our litigation against Disney was launched in February of last year. So far, five enforcement, meaning individual patent enforcement cases here. So far, there are five patents being decided by courts in different country. So far in Brazil and Germany. Out of the five patent being decided, we have win all of them.
Five out of five are patent being found to be valid and infringed, and the court has ordered injunction, which is an order from the court to say you need to stop unless you get a license of this technology. We are doing really well, and we have about half a dozen more individual patent coming to trial on the Disney case. The Amazon timelines are a bit different. Amazon actually sued us first because they have a small device license that covers all the way to end of last year, but they litigate against us in September of last year. We frankly launched our counterattack in November. If you compare Amazon to Disney, there's roughly a 9 to 10 months delay. So far the case against Amazon in terms of patent cases has not gone to trial yet.
We are confident about our technology, and we feel our patents are really, really strong. That's sort of the current situation.
If we're kind of thinking about who might be your first licensee in streaming, is it likely to be Amazon or Disney, or could it be one of the other streaming providers? How do you think about negotiating with the others while this litigation with Disney and Amazon is going on?
Yeah. We are actually negotiating with all the major vendors and just sort of take a step back here. As a company, we always prefer to license through bilateral negotiation. Always. Frankly, in our core field of smartphone and consumer electronic licensing, about 80%-90% of contract gets done by negotiation. Okay. Vast majority. Both from the size of the contract as dollar amount and numbers. In a brand new field, frankly, there's an interesting dynamic because even though people recognize that they are using our technology and infringing our patents, sometimes vendors, even very large vendors themselves, based on IP, doesn't want to pay or doesn't want to be the first to pay. Therefore, it creates somewhat a logjam that we feel, in this case, it's needed for litigation to essentially enforce our right and to a certain degree, set a benchmark.
That's the effort we are in. In the meantime, though we are negotiating with all of them, it's hard for me to predict which one will be our first customer. Also, it's important for us to set the right pricing. We are licensing a patent portfolio, and frankly, to a certain degree, so in our industry, there's a thing called comparable license. Essentially, it's how is your competitor paying for a very large portfolio itself has certain amount of reference value. We want to make sure we be careful regarding valuation. I always tell my own board to say, I can essentially be very confident about the value of our IP. We also, as a company, have an extraordinarily strong record about enforcing our IP right.
As a matter of fact, throughout history, every time we started getting into a multi-jurisdictional enforcement campaign, we always end up in a license, every single time. What I cannot completely control is the timing of this deal. It takes two parties to agree on the license. All I can do is control the best we can, demonstrate the value, enforcing our IP right over time, and hopefully, our customers, over time, recognize the value, and we end up doing a deal that's fair to both party. We are patient. We are ready to demonstrate value over and over again, and we have an impeccable track record getting deals done.
Your point just on the first customer in this market, you're sort of setting a precedent in terms of price and the value of your portfolio. You're kind of being careful in terms of what you agree to, I assume, with the first deal.
Yeah, to a certain degree.
To a certain degree.
Yeah.
Yeah. In this market, like in smartphones, we can sort of come up with a royalty rate in terms of number of devices. What does the monetization look like in the-- I know you don't have a deal yet, but how are you trying to structure or how should investors think about the structure of a streaming license agreement?
Yeah. If you think about it, right, at the highest value, at the highest level, we are trying to get a very small slice of a very large revenue pie. That's almost inherent of IP licensing model. How do you get to that small slice? What is the base for what you are asking for? There's actually multiple approach for it. At the most fundamental level, you try to do a bottom up. You try to demonstrate what is the value of the IP that's enabling to them, both in more profit, more revenue, or in cost saving. How much money they are saving by able to compress this content 1,000 times to one, and you do a number allocations on how much we deserve to be paid on the IP. That's in general.
In practice, when we sign the deals here, if you look at the smartphone side, we can negotiate based on a percentage of the device, times the volume, times the average selling price. You can base on forecast, right? Keep in mind, our license is future-looking. You base on all the forecasts from third-party, you translate that into a certain amount of value, and you do a NPV calculation, you spread over the term of the contract. That's how we've done in our smartphone program. A similar methodology can be done on the streaming side, and the reality is we are flexible. If a vendor wanted to say, 'Look, I want to pay you certain dollars or cents per sub per year and going forward,' we are absolutely willing to entertain. If a vendor come in to say, 'You know what. Here's all the numbers.
Let's do the forecast, do the discount, do the volume, everything here. I want to pay you a certain dollar amount in whatever millions per year. We are absolutely willing to do it also. I like to say in the world of perfect information, those two things are the same. Obviously, the world are not perfect, and information has its own risk up and down. Involve certain amount of risk sharing. In the smartphone field, once you have achieved certain amount of market share, we are 85%, they actually evens out. Some will be over-performing, some will under-perform, and once you gain certain market share, you get enough stability in how much you have it licensed. That's the same. It has been proven to us over multiple decades.
In this new field here, we are willing to entertain both, and we just want to be fair to both parties.
Okay. Maybe just last one here before we wrap up. You have the 2030 target that you talked about.
Yep
which is $1 billion in revenue. It includes $300 million from streaming. You've pretty much hit your smartphone target.
Yep
already. What comes next? If you're successful in streaming, then what are sort of some of the next potential technologies you could license and other IP that you have?
The beauty for what we do is we build foundational layers. Think of us as building the infrastructure for connectivity, immersive user experience, and intelligent user experience. We actually do not have to specifically define what the future looks like, as long as human beings will always want to be connected, as long as we always wanted more rich user experience. For example, in the video space, in the cloud, streaming video industry is just our starting point. There's already a number of other stuff in gaming, in live entertainment, in AR, VR, in 3D content that we know our technology applies. We just wanted, frankly, market to grow into a very sizable opportunity for us in licensing. Talk about AI, right? I strongly believe AI, over time, as people are deploying edge AI, physical AI with hyperscalers in the cloud, those interface over time will be standardized.
Standard, the powerful standard pushing for compatibility and interoperability wins every single time. Open system wins every single time if you look at human history. Therefore, our AI assets over time will be enormously important, and you certainly look at those use cases that other people benefit from. I'm very confident about the value, and the $300 million plus, in my opinion, just a starting point for our cloud licensing opportunity. Over time, I actually believe will be bigger than the device side. The industry trend is very clear.
Okay. The Plus is very important.
Yes.
Okay, we'll leave it there, Liren. Thank you so much.
Absolutely.
We have a breakout up in Burnham A for more Q&A.
Thank you.