InterDigital (IDCC) Q2 2026 earnings call transcript

Thank you, Kathleen, and good morning, everyone. Welcome to InterDigital's second quarter 2026 earnings conference call. I am Rayford Garibrandt, VP of Investor Relations for InterDigital. With me on today's call are Liren Chin, our president and CEO, and Rich Breske, our CFO. Consistent with prior calls, we will offer some highlights about the quarter and the company, and then open the call up for questions. For additional details, you can access our earnings release and slide presentation that accompany this call on our Investor Relations website.

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 made only as of the date hereof. Forward-looking statements 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 described in the risk factor sections of our 2025 annual report on Form 10-K and in our other SEC filings. In addition, today's presentation may contain references to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the supplemental materials posted to the Investor Relations section of our website.

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

Thank you, Riefer. Good morning, everyone. Thanks for joining us today. We have delivered an outstanding quarter with continued momentum across each part of our business. We achieved revenue of $260 million, a just EBITDA of $184 million, and non-GAAP EPS of $4.62, all far exceeded the top-end-dollar guidance. We also increased our annualized recurring revenue to a record of $626 million, an increase of 13% year-over-year, keeping us well on track to reach our goal of $1 billion plus ARR by 2030. Building on the strength of second quarter result, the increased business momentum, and the opportunity to drive more progress over the balance of this year, we have raised our 2026 full year guidance to between $775 million and $845 million, up $85 million at the midpoint.

As you previous quarters, RIS will cover our financial performance in more detail. The highlights of the quarter were the important milestone we achieved in our streaming and cloud service licensing program. I'll cover our new agreement with Amazon first. As we have previously announced, we have agreed to enter into a patent license agreement with Amazon, covering Amazon's devices and services, including Amazon's prime value, with the final terms to be determined through arbitration. We expect the process will take roughly 18 months to 24 months to complete. As part of the agreement, we have resolved all pending delegations between us. The Amazon agreement is an important milestone in our goal to drive growth through our streaming and cloud service licensing program, and to hit our goal of 300 million plus in ARR from this program by 2030.

This is also a clear recognition of the value of foundational video technology in both devices and services. As I have said many times, our preference is always to conclude Dyson's agreement through bilateral negotiation, and when disputes do arise, to use binding arbitration to decide the final terms of an agreement. This is a patch we have followed recently in our arbitration with both Samsung and Lenovo. Speaking on the streaming and cloud service licensing program, we continue to make excellent progress in our enforcement effort against Disney. During the quarter, we were awarded our first injunction against Disney from the European Unified Patent Court. The court wrote that Disney infringed one of our patents covering video encoding technology related to HEVC and confirmed the validity of our patent.

In addition, the court found that Disney was an unwitting licensee. The UPC is a pan-European court, and the injunction applies close 11 EU countries, including major markets like France, Germany, Italy, and Netherlands. Last week, we received our second injunction against Disney from UPC, covering another pattern that covers video coding-encoding related to HVC. As with the first UPC injunction, this decision applied across the same 11 countries in the EU.

In this decision, the court was highly critical of Disney's conduct, again it found Disney as an unwitting licensee, and found that InterDigital has acted in a fair manner in the licensing negotiations. These are the latest injunctions that we have made against Disney, and we are working with the core to enforce them. We believe they are important steps to reach a long-term license agreement with Disney on fair terms that reflect the value of our technology that enable Disney to build one-to-one leading streaming business. Our recent round of success against Disney is also an indication of the quality of our research and our patent portfolio, as multiple courts have found our patent to be valid and infringed.

While we always prefer completing license agreements through bilateral negotiation, when we do enforce our patents, we have a strong track record of reaching agreement in the end. As we continue to build momentum across the licensing program, in the second quarter, we signed a new IoT licensing agreement with a leading fintech company in the payment space. The agreement covers the licensed point-of-sales devices and our cellular and Wi-Fi patterns. After the end of the quarter, we closed another new license with Kebom to cover the company's EV chargers, also under our cellular and Wi-Fi patterns.

Both agreements are a good demonstration of the rich hour technology and the range of industry that depends on the standard we help build. Wireless connectivity is now embedded in an expanding number of verticals, and this deals with a sign of broader IoT opportunity ahead of us.

We believe this trend will only continue with the development and rolling out of 6G, which is why we continue to invest in our research engine and in our leadership of global standards. The quality of research across wireless video and AI combined with our standard leadership continue to be a major competitive advantage for us In the second quarter, one of our senior wireless engineers was elected vice chair of a key working group in 3GPP, which is the standard organization that leads the development of each generation of mobile, including 6G. Our total standard leadership position is now well over 100, and we remain one of the only three companies in the world, and the only U. S. company with multiple chair positions across 3GPP.

These positions help inform the direction of research and place us in an even stronger position to define key technology standards across wireless, video, and AI. I was also pleased to say that during the quarter, we were recognized by Business Insider as one of America's high-growth companies. This award recognizes the progress we have made in recent years and the momentum we are carrying into the second half of 2026.

With that, I'll hand it over to Rich, who will walk you through the numbers in more detail.

Thanks, Laren. I'm thrilled to report that Q2 was another outstanding quarter for InterDigital, and an important milestone in the expansion of our licensing programs. Our results were well above the guidance we provided on our last call, and they included quantifiable progress towards our goal of $300 million-plus of ARR from streaming and cloud services by 2030. This milestone was driven by our new agreement with Amazon. As Liren discussed, Amazon has agreed to enter into a patent license agreement covering both services and devices, including Prime Video, with the final terms to be determined through binding arbitration. The agreement also resolves the pending litigation between the parties. Total revenue for the quarter was $260.2 million, compared with our Q2 guidance range of $139 million to $143 million.

Revenue included $103.7 million of catch-up revenue, while annualized recurring revenue, or ARR, increased 13% year-over-year to a record $625.7 million. Looking at revenue by program, smartphone revenue was $122.7 million, CEIOT and auto revenue was $27.5 million, and streaming and cloud services contributed $110 million.

Let me take a second to discuss revenue recognition for Amazon. While Amazon has agreed to enter into a patent license agreement, the final terms, including the value of the agreement, will be determined through arbitration.

Under GAAP, we recognize revenue in this circumstance based on a conservative estimate of the consideration we expect to be entitled. While the final outcome of the arbitration cannot be assured at this stage, we currently expect that any adjustment to revenue at the conclusion of the process is more likely to increase rather than reduce recognized revenue. This is similar to the approach we took in 2023 after Samsung agreed to take a new license effective January 1, 2023, while the final terms were still being determined through binding arbitration. In that case, we recorded revenue based on a conservative estimate during the arbitration period, and then recorded an adjustment once the final arbitration decision was received.

With respect to Amazon, if the final arbitration award differs from the cumulative revenue recognized during the arbitration process, we will record the resulting adjustment when the award is finalized.

Turning to profitability, adjusted EBITDA for the quarter was $184.1 million, compared with our guidance range of $67 million to $73 million. Our adjusted EBITDA margin was 71%, compared with the roughly 50% margin implied in our prior outlook. Operating expenses increased $25.8 million year-over-year, primarily due to an increase in intellectual property enforcement costs and performance-based compensation driven by business success.

GAP diluted for EPS for the quarter was $3.40, compared with our guidance range of $0.80 to $0.97. Non-GAAP EPS was $4.62, compared with our guidance range of $1.41 to $1.60. Cash generation was strong, with cash from operations of $82.5 million and free cash flow of $66.6 million. As we noted on our last call, we expect a collection of accounts receivable from new agreements signed in Q1 to drive strong cash flow in Q2. And our second quarter cash generation was consistent with that expectation. Consistent with our capital allocation priorities, we continued to invest for growth, maintain a fortress balance sheet, and return excess capital to shareholders. During the quarter, we returned $41.1 million to shareholders through $23 million of share repurchases and $18 million of dividends.

We ended the quarter with cash equivalents and short-term investments of $1.1 billion. Our Q2 results again demonstrate the leverage in our subscription-based licensing model. The long-term fixed-fee nature of most of our agreements provides visibility into our business, supports ongoing investment in research and portfolio development, and gives us the flexibility to pursue opportunities across our licensing programs while continuing to return capital to shareholders.

Looking forward to Q3, we expect $154 to $158 million of revenue from existing contracts. Any revenue from any new agreements or enforcement decisions over the balance of the quarter would be additive to these amounts. Based only on existing contracts, we expect adjusted EBITDA margin of about 57% and non-GAAP diluted earnings per share of $1.94 to $2.13. In addition, we expect another strong quarter of free cash flow in Q3 driven by scheduled payments due under existing agreements. As Lira noted, we are increasing our full-year 2026 guidance. We now expect revenue in the range of $775 million to $845 million, up from our prior range of $675 million to $775 million. That is an increase of $85 million at the midpoint.

We now expect full-year 2026 adjusted EBITDA in the range of $469 million to $529 million, with non-GAAP BPS in a range of $10.85 to $12.81. As we have said before, we continue to think about the full year through a multi-path approach with different combinations of existing contracts, renewals, new agreements, and enforcement outcomes that can deliver financial results within our guided ranges.

With that, I'll turn it back to Rayford.

Thanks Rich Before we move to Q I like to mention that we be attending a number of investor events in Q3 including the Jefferies Semiconductor IT Hardware and Communications Hardware Conference in Chicago the Midwest Ideas Conference in Chicago and the Sudodi Small Cap Conference which is virtual Please reach out to your representatives at those firms if you like to schedule a meeting Now we are ready to take questions.

Thanks, Scott. Laren, maybe just to dive in on that front, you've had some important milestones with Disney as well now with two separate injunctions awarded by UPC. Can you take us through the timelines and the next steps? It sounds like you are working with the courts in terms of that injunction and otherwise, but what are the various avenues here to move forward if you could give us some idea? And then from a broader perspective, you know, a couple years ago when you guys articulated the opportunity for streaming, I'm wondering now, as you're getting in and you're starting to get some of those data points with the baseline from Amazon, in terms of what you're seeing from a RevRec standpoint, as well as the expansion of the marketplace, is that opportunity actually expanding beyond the $300 million that you guys initially talked about?

Yeah. Hey, Scott. Good morning. Yes, so let me explain the UPC process as well as, you know, the broader view for the overall market. So as I mentioned in my prepared remark, we have done very well in our enforcement campaign. As you are aware, we have received multiple injunctions from different jurisdictions. With the latest one being UPC, one received during the Q2, one received frankly only last week. So we're in the process of enforcing them, and there's a process in those core systems for us to go through the process.

We do feel our patents are extraordinarily important. As you are aware, both the patents we received for the UPC injunction are related to the core features of encoding technique related to HEVC that we believe drive a lot of value. And I do feel, you know, this is a, and by the court also found Amazon to be an unweighted licensee that we are conducting our license fairly.

As I commented before, as we frankly commented in our press release, we do believe the right outcome is for Amazon to take license. That's fair to both parties. For Disney, I'm sorry. And we absolutely think we are on track to do so. Okay.

Regarding the broader picture for the licensing opportunity in streaming and cloud services, notice that when we disclose this opportunity in the investor day, we said we believe this opportunity will be a $300 million plus ARR by 2030, but we do emphasize there's a plus sign to it. So this is not an endpoint. This is essentially a milestone point we see. We believe we are executing really well. Obviously, there's still multiple years in this journey, and we have to keep on focusing on doing everything we can to execute our strategy.

Hey, Scott, let me take the first half. We are proceeding well with other negotiations. So frankly, we have a strategy to approach all the major customers in both the S-VOD as well as the A-VOD space. So we are proceeding well. I do believe people are paying attention to our progress with the Amazon discussion as well as the Disney progress. And I'm hoping to report more progress as we proceed with the negotiations in coming weeks and in coming quarters.

Yeah, and Scott, regarding the Amazon moving to arbitration and the outlook for enforcement costs, certainly one of the benefits of arbitration is it kind of ring fences things. be more efficient. So that's definitely a benefit, and we expect that to impact what we otherwise would have expected from a multi-jurisdictional litigation campaign against Amazon. At the same time, we have a number of other enforcement actions ongoing. So while I think it's helpful, I don't want to oversell it that expenses would come down too much in that area while we have these other cases ongoing.

Yeah, hey, Arvin, good morning. As I commented earlier, we feel really good about where we are. Obviously, the Amazon agreement we reached is a major milestone, and we have been proceeding well with this need. I do believe the rest of the industry is paying attention. As of now, I don't have status to update on our litigation or enforcement strategy. And as I commented before, we always prefer to get deals done through bilateral negotiation, and we are, you know, patient and frankie-ferty balancing those negotiations. And as of now, I don't have an update on other litigation possibilities.

Arjun some of those details at this stage are confidential so I will go back and and emphasize some of the comments I made that you know we are basing that revenue on an estimate while we in arbitration with you know some terms including the final value of the license agreement to be determined by that arbitration And that's similar to – at that high level, you know, the situation we're in a couple years ago with Samsung.

Yeah, well, again, it's the value of the agreement. So, you know, that would be part of that value.

Yeah. Hey, Arjun. So you're aware, when we started the enforcement campaign, we had a comprehensive strategy. We intentionally picked patent covering different area of technology and asserted them in various different jurisdictions. And we are very happy with the win we have. And as I mentioned earlier, we are in the process of enforcing them. By the way, we also noticed from third-party report, certain key services are being disrupted in European market, including 4K HD content, which I believe are very important features to the premium-tier customers.

And so, by the way, we also noticed there's report of consumer protection agents investigation that's been either triggered or discussed. So I do believe those are important services, which again, reflect on the foundational nature of our technology and our patent, and frankly, indicated the fair value that we are trying to receive.

Thanks. Thanks, Arden.

Yeah, so Kevin, when we talk about our full-year guidance, I mentioned that we have a multi-path approach, which could include renewals, or if for whatever reason we don't execute on those renewals, we have other opportunities as well. So we see a couple of different paths to get there. We're not, you know, locked in on any one. We're working across all those opportunities.

Yeah, so I think in terms of – at this point, we're really just estimating the revenue based on the eventual arbitration outcome.

And as far as getting into the terms, I can't really say more than what we've commented on at this point.

Thanks, Kevin.

Yeah, so Anya, when we think about capital allocation, we think we have a great business. We want to keep investing in it, so that's certainly paramount. We want to make sure that we keep a strong balance sheet because we do have these enforcement actions against very large companies, And we do want to return capital to shareholders. We continued to do so in Q2. As far as the level and timing, that's always subject to a number of different factors. I always say if you broaden the aperture, we're always doing quite a bit there. If you focus on any small window, you're not necessarily going to get the whole picture. And then in terms of the debt, back in Q1, we had about $80 million of early conversions and paid that off.

You'll see in the Q that we talked about another $83 million that's in the process and is expected to close in terms of early conversions in the next quarter. So it's something, you know, part of our capital structure that we're always looking at. Those conversions are actually driven by the debt holders. But, you know, we're happy to, you know, remove the debt.

Yeah, so Anja, this learned. So generally speaking, this process works like this, right? We are currently trying to get some of the terms resolved, and then whatever term we could not agree upon go to the arbitration, and then there will be a process to select the arbitrator. I think we described this in the protocol before. Either party, both parties come up, you know, one arbitrator and collectively pick the third one, and that process can take a little bit of time. And afterwards, both parties will present their evidence to the arbitrator, and that process can, generally speaking, take roughly 12 to 18 months. So we add the front end of the process, combined with the whole thing we are currently estimating to be about 18 to 24 months.

And that's, Pretty much aligned with our Samsung experience, and that's also well aligned with our Lenovo experience regarding timeline.

Thank you.

Thank you, Kathleen. Before we close, I'd like to again thank our colleagues for their dedication and contribution to InterDigital, as well as our many partners and customers for a strong quarter.

Thank you all for everyone who joined the call today, and we look forward to updating you on our progress next quarter.