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InterDigital, Inc. (NASDAQ:IDCC)

40th Annual J.P. Morgan Global Technology, Media and Telecom Conference Call

May 16, 2012 4:10 pm ET

Executives

William J. Merritt – President and Chief Executive Officer

Analysts

Paul Coster – JPMorgan

Paul Coster – JPMorgan

Alright. Good to go alright. Thanks very much my name is Paul Coster, I’m the Senior Analyst covering applied emerging technology at JPMorgan and this is the 40th Annual JP Morgan TMT Conference. And it’s my pleasure to have Bill Merritt the CEO and President of InterDigital we do not cover InterDigital. So this is a kind of a new story for me. So apologies if it was obvious to new audience. Bill, let’s assume everyone is as ignorant as me for a moment, and perhaps you can tell us what, what are those things that InterDigital does?

William J. Merritt

Sure, InterDigital is a technology development and licensing company, we’ve been around for about 30 plus years, focused principally on cellular technology, and the focus of our R&D is really to look at that next generation of technology, create the inventions that will drive those systems, contribute those inventions to the standards that are written for each successive generation of cellular telephony, and then we licensed the patents related to those inventions to the industry.

So for 2G we licensed over 80% of the market, to our technology we collected about $1 billion in revenue, for 3G we have about 50% of the market under license, they collected just around $2 billion in royalties with the market really being still relatively new on 3G and have now embarked on an LTE licensing program, about six deals under them so far.

So very strong in terms of R&D strength, one of the largest patent portfolios in terms of standards-essential patents or declared patents in the industry, and delivered good financial success in less number of years, well that’s who we are.

Paul Coster – JPMorgan Securities LLC

All right, so lets start off with this time last year, which is soon after the famous Nortel portfolio went to sale, I think it was about $4 billion, and I think soon thereafter you said, this market might be worth taking a look at selling the company or pass thereof and that process been unfolded, here we are a year later, and well talk us through the whole process?

William J. Merritt

Sure, I think prior to the Nortel process we saw IP values escalating generally across the mobile industry in particular, and the Nortel, Oxygen really sort of brought that to ahead in terms of sale price for a patent asset. So at that point, well the business was doing great we had come off a year in 2010 we had $400 million in revenue 2010, doing very well. So the business looks strong but the board made a decision to explore strategic alternatives.

And what we explored in that process was really the sale of the entire company. In doing that we did – we sort of had a very consistent result with folks who came through the process and it was a very robust process. And that result was people would find that the breadth of the portfolio was significant, the value was significant and that they didn’t need the entire portfolio.

And in fact if you looked at acquisitions – or transactions that had happened in the patent space around us at that time and even Nortel is an example. No one was paying more than $1 billion or so for a set of patents, and the transactions happened above that level. It was a group transaction. So we quickly got into an exercise, the only way we could sell the entire company was if we sort of herded together a group of buyers. That’s a difficult process there is tax implications in doing that in efficient in terms of the tax structure. But we continue to get interest for smaller pieces of the portfolio. So with that the company made the decision in January of this year to exit the process, and to basically pursue the core business, which was licensing which continued we believe add a lot of value.

But to augment that strategy with targeted patent sales of assets that were not necessary to drive that core business. We’ve involved in that sort of separate smaller portfolio of sales process for a number of months. It’s going well. And so we hope to see transactions on that side as well as on the licensing side we came out of the process and very quickly did four or five deals.

Paul Coster – JPMorgan

I am sure you want to talk about the core licensing business, but before we get to that, somebody kind of a draw a line onto this potential sale process, it’s not just a potential sale. I think the wording that I saw on the recent document is that, you also evaluate, I mean otherwise in monetizing those non-core portfolios, is that right?

William J. Merritt

That’s correct.

Paul Coster – JPMorgan Securities LLC

So what does that mean?

William J. Merritt

It’s really, I put them into three categories of transactions, right. One is an outright sale cash, very straightforward. And second is putting the assets into another venture in which we maybe a participant in that venture. And that venture can be with us and an another company that does not provide patent assets, but maybe provide cash and working capital. Or it could be another company who provides patents and that would complement our assets. And so that’s another type of transaction.

The third place the patent sales can be used is in combination with the core licensing program, if certain of our licensees are looking for defense, as part of driving a patent licensing relationship with that customer, you also include as that deals and patents. So it’s being used sort of an unauthorized service.

Paul Coster – JPMorgan Securities LLC

So in identifying these non-core patents – and I promise you, this isn’t the central thought of my discussion today, but in pursuing those opportunities, presumably of course due to defined portfolios, it’s great to fund, right, and then commercially present them to the market? Is that correct, Bill?

William J. Merritt

Yeah, I’d say that the portfolio had been very well characterized before that process. I think a couple of things happened, was the portfolio was experiencing very significant (inaudible) in terms of – especially in terms of LTE, we had the LTE portfolio was growing substantially as a result of investment we made in less number of years. WCDMA portfolio continue to grow, and we were in the process as a result of people inquiring about piece of the portfolio we did become focus on is there a way to split off pieces of the asset without affecting the core licensing program. And we got very comfortable during the process that we could do that. It’s really two types of assets one is non-terminal unit assets so the main licensing program for the companies non-terminal units so things like infrastructure assets and things like that can easily be split off and sold or ventured another partner.

But even terminal unit patents we found that in licensing discussions we had so much to put on the table that there was this diminishing incremental value of that extra patent and so today we have two portfolios in the market one is infrastructure related one is a terminal unit related. Both of which again I think we can sell through or partners or otherwise secure a very good value for and also continue to drive the patent licensing program as we’ve done over the last couple of years.

Paul Coster – JPMorgan

Alright, then let us focus on the core-licensing program, which is your focus execution thereof. Is this a royalty business or is this a one-time settlement type business was it both?

William J. Merritt

It’s very much of well a royalty business so it’s a recurring revenue over the period of the agreement. The structure of the agreement can be either in as part of unit royalties so the revenue actually tracks the sales, it can be in terms of a series of payments that’s representing lump sum for the sales in that period, but very importantly with respect to 3G and then 4G when those agreement come up for renewal we are able to fully renew the agreement so there is no aspect of 3G or 4G that’s paid off.

Paul Coster – JPMorgan

What is your approximately revenue run rate and can you in some way help us understand where it’s all coming from in terms of segments or customers or generations and technology. It sounds like it’s skewed towards 3G, now 4G.

William J. Merritt

Yes, mostly let’s say it’s predominantly 3G. There is a very small component of 2G and there is probably even a smaller component of 4G based upon the small number of 4G sales that are occurring in the market today. It is dominated by handset sales. It comes from two types of agreements as I mentioned there is preferred unit agreements that probably represents approximately half or so of the revenue and then the other half is represented by agreements that are fixed price over the period of the transactions whether it’s a four year deal or seven year deal, it’s a fixed sum for that period. Top customers are Samsung, HTC, RIM, lot of the smartphone folks are the main customers. And good geographic spread as well, we have a lot of Japan under license, lot of Taiwan under license, the few remaining U.S. manufacturers we have under license. It’s a pretty good coverage across the market and as I said before about all in approximately 50% of the market – the 3G handset market under license.

Paul Coster – JPMorgan Securities LLC

So, you’re presumably pursing the other 50% and I think we will come to LG litigation and Nokia’s (inaudible) shortly but is Apple a licensee?

William J. Merritt

Yes, they are.

Paul Coster – JPMorgan Securities LLC

They are. You didn’t mention them earlier on so it can’t be a significant one.

William J. Merritt

Yeah, the Apple agreement was done back before they launched the iPhone. And it was a fixed price deal. So I think we relied on some investment, some forecast at that time. So based on the forecast, the rates looked really good, but based upon the actual shipments, and that happens sometimes and it goes both ways we’ve had deals that have gone the other way as well. So the opportunity there is to when the agreement, when the opportunity again to the agreement comes up to renew, we re-price the agreement and get it back and sort of more normal effective rate.

Paul Coster – JPMorgan Securities LLC

And when will that be, when will be actual deals come out for renewal?

William J. Merritt

So the contract itself runs through the middle of 2014 with most of our licenses. as a general matter, we are in almost at constant dialog, but we tend to get to people sooner than that either because we just think it makes sense to start discussion sooner or because there’s opportunities in terms of the license coverage in their actual shipments. And so with respect to all of our licensees of any significance, we are in discussion with the clients.

Paul Coster – JPMorgan Securities LLC

So at the time, you didn’t know Apple iPhone would be so big but then again on the other hand, they presumably, you since then added more patents to your portfolio, right?

William J. Merritt

Correct.

Paul Coster – JPMorgan Securities LLC

Are they infringing on as newer patents?

William J. Merritt

Yeah. The patents, so as an example, when they launch LTE products, that’s an additional set of patents that they would inference, since that Apple agreement was done back in 2007. obviously, we had more patents issued on the 3G side. and so what we would bring and we’ve also acquired some patents while we don’t we’re not a big acquirer of patent. we’ve acquired with some targeted assets that deal with things like content delivery and things like that, because we just like everyone else, we see how the business is evolving, it’s not so much about the handset sale anymore its about that use of that handset in the content delivery. So we’ve moved not only our R&D programs, but some of our M&A efforts to cover that. So we will have actually well back in 2007, we had a very strong position with Apple to deal with; we have an even stronger position to that.

Paul Coster – JPMorgan Securities LLC

All right. And then what normally happens when you come up for renewal for new license, is there generally a one-time payment to compensate for back royalties or is it usages going forward looking in nature?

William J. Merritt

Typically, you roll the economics, it varies. But I’ve seen it more often and that gets rolled into the board payments as…

Paul Coster – JPMorgan Securities LLC

I’d say net present value from an investor perspective is the same is just to…

William J. Merritt

Yeah.

Paul Coster – JPMorgan Securities LLC

You will recognize on the four-royalty rate. So we shouldn’t expect one-time settlements in large part here but you’ve had one in the past …

William J. Merritt

Yeah, we had a number of royalty settlements, and the accounting treatments are a little bit different now like a change at the beginning of last year on any deal where there is a component of past sales being compensated for, we’re going to have to allocate whatever – some amounts of that past sales depending upon the structure of the deal. So, even if we’ve structure this for running payments, it could be that you’ll recognize a larger amount of revenue or some amount of revenue or upfront.

Paul Coster – JPMorgan Securities LLC

All right, so apologize if I’m demonstrating my ignorance here I don’t know what’s in the stock I don’t cover it but I understand that there is an event coming up soon, which is the trial date for you patent infringement case against LG and it sounds like you may have implications beyond LG, two others as well. Can you talk about what that all is and so help me understand it?

William J. Merritt

Sure. We have an ITC case involving LG, Nokia, Huawei and ZTE, so it’s four parties in that case. It goes to trial in the last week of October. Two weeks trials also it will continue over to the first week of November, and if you think about today, we sit with about 50% of the market under license, the parties in that litigation represented about 30% of the market. So success in licensing in that litigation, we’ll get as up to roughly 80% of the market under license. And success can come in lots of ways because success obviously can come from prevailing and litigation itself. And at the ITC and prevailing means, the entry and exclusion order with respect to those products. But more often than not success comes as parties settle ahead of that event and so we are in discussions with all those folks in terms of trying to resolve that we would prefer to resolve things on a fair reasonable basis.

Ahead of trial we can do it if not we are very comfortable with that case it’s a, we think in particularly strong case it has nice diversity of patents, eight different patents, five different patents families, 140 patent claims in the case right now involving some new patent to litigation but actually involving some patents that have been through litigation before taking back to the patent office to cure some of the identified defects in those patents, in those particular patents before and so. We are very comfortable with the case and so therefore very comfortable taking the trial that we need to but would be happy to settle that with folks ahead of time.

Paul Coster – JPMorgan Securities LLC

Are you in a position to quantify possible royalties coming out of this in annualized basis?

William J. Merritt

Well, if you think about we can use LG as an example, LG used to be approximately $57 million a year in royalty revenues to the company. That was an agreement that ran from 2006 through 2011. If you look at that agreement and looked at sales of LG between a net five-year period and the subsequent five-year period you can kind of measure up what, the opportunity is there, their market position has declined but the market is bigger, so the math the table what the numbers should be but it will be significant.

Paul Coster – JPMorgan Securities LLC

Nokia is I mean on declined but it’s still bigger than LG right?

William J. Merritt

Right, Nokia is still a very significant number, so if you think about just again size of opportunity, Samsung deal back in 2009 for the company a four year deal with Samsung was $400 million, $150 million that was the passed sales components of 250 was forward running. At that time, Samsung probably had about 15% to 18% market share. So in a smaller market, so again you can kind of take that number and translate it up to Nokia.

So these are all very large deals, it’s one of the reasons why discussions take a while with folks because it’s very significant number we’re dealing with. Also the reason why we use litigation as to try to not have the discussions go on (inaudible).

Paul Coster – JPMorgan Securities LLC

I am surprised the stocks continue to slide in view of the proximity to this trial day. Is there something else going on there that I should be aware off?

William J. Merritt

Yeah, and I think you’ve been with the company for almost going on 20 years, and I’ve seen relatively the stock is volatile. I think it drives to an extent off of people’s expectation as to the timing of license agreements, and their degree of confidence in our success.

And I think coming out of the process, because of the process, we hadn’t done a deal for a while. What we’ve done five deals since then, they’ve been small deals. So, I think it’s always hard to say why things trade the way they, but I suspect the market is looking for one or two big deals by the company with these larger players. And then, we’ve seen in the past once those deals are done, then we start to get credit for the deals that aren’t done yet. So that’s my guess, but I don’t spend a lot of time investigating why the stock is trading where it is.

Paul Coster – JPMorgan Securities LLC

All right, so you’ve traditionally developed the patents that are used extensively in these interfaces, but the last time we met with you, you still were talking about network of networks and some of the interface kept those gateway technologies and software combining different networks, because there is nothing sort of name probably – hope those are on top of my head, whether it’s cellular, or Wi-Fi or Bluetooth or ZigBee or whatever.

I also understand that you’re moving into the content part of the problem as well as specifically relating to compression is, there’s something called Smart Access Manager, which I don’t know – should know what it, but I understand that’s also quite important. So perhaps you can just talk to us about this diversification away from just the air interface technology itself?

William J. Merritt

Sure. And I think the industry had historically driven off of sort of one solution, it’s how it delivered greater services, it just built bigger pipes. and so you went from GSM through GPRS and Edge to WCDMA to HSDPA/HSUPA, each one was just a bigger pipe. so it was capable to deliver more and more data.

I think what you’re finding is that, there is limits to that type of approach, both in terms of spectrum limits and other limits. And where we see innovation happening now is on multiple fronts. For sure, they will continue to be bigger pipes so LTE, LTE-Advanced are continuing to be developed, and we’re very much involved, and that’s core competence of the company.

But you also need to approach the problem of delivering what have become very bandwidth intensive services to customers, by not only looking at how big the pipes are used, but how efficiently they’re used, how they’re used in combination, and how you most efficiently deliver those services to the consumer so that you’re not wasting bandwidth on one customer while starving bandwidth from another. and that really is the driving concept behind the network of networks.

It basically says, the plumbing is out there. yeah, we’ll put some more bigger pipes up, but the plumbing is there. but the plumbing is used inefficiently. There’s a great deal of signaling that heads all the way back to the core network that doesn’t need to do that. There is a lot of information that runs back to the core network that doesn’t need to do that. There’s signaling that takes place in a – or data transfer that takes place on a Wide Area Network base, that could take place on the small cell basis in a much more efficient way. And the company really has been driving this next network topology for the last five years and you see it now happening.

Five years ago, people thought we were a little, I am not saying nut, but it felt like we were pushing the arm too far but actually what you see now is these types of technologies coming in. So operators who once preclude WiFi are now embracing WiFi, buying WiFi access, because of the uploading capacity of the WiFi.

There is technologies out there that will segregate applications so that part of your, one application on your device is WiFi well, different one is using cellular. You do that because each of these wireless access systems are good for particular purposes and not so good for other purposes. What you want to do is use the service that’s right for the, or use the wireless access that’s right for the service that you’re currently using and do that in a seamless, intelligent way for the customer and that’s what we’ve done and we’ve now begun in the last three or four years to standardize that technology.

So things like bandwidth, handoff bandwidth aggregation, IP flow all becoming part of the standards efforts today. And as another part of this, related to a network, network is a whole machine-to-machine topology. If you think about 50, Ericsson talks about 50 billion connections. 50 billion connections on the current network would destroy the current networks, because currently machine-to-machine connections signal all the way back to the core. We absolutely drove the SE framework, which pushes authentication and security out to the edge of the network allowing the connections to improve more rapidly, more efficiently. And that structure that we developed is now becoming part of the worldwide standards from machine to machine. So a lot the innovation now happening on the network and how the networks are managed.

And then the other part of our development is really in terms of other technologies that can make the networks capable of delivering more data to customers so as an example compression very important and the interesting thing about compression, compression has been developed historically for non wireless, non mobile environment. And there’s an interesting inner section between wireless technologies and compression and we are developing what we call video aware wireless technologies and wireless aware video technologies. So that you can advantage of the characteristics of each of those systems in an intelligent way to deliver video over wireless.

Paul Coster – JPMorgan Securities LLC

The compression methodology would be a function of the actual the communications base length.

William J. Merritt

It yeah it would be sensitive to the fact that it’s going over wireless. So as an example every- today when information is sent over a wireless network. It doesn’t matter what that bit of data is illustrated exactly the same. It doesn’t matter if it’s voice video word traffic it’s treated exactly the same.

The problems on video you can get aero propagation that’s different as you get on the voice not on the pace. So you need to understand what it’s you are delivering over the network and you need to deploy different types of for example aero collection mechanism a video that you would do on other technologies. So it’s again, it’s making video or wireless aware and our knowledge of wireless systems, which is extensive as a result of being vibratory of our viewers has allowed us to take that and we take that knowledge and we combine it with a new compression capability we’ve brought in house. And we are basically working at that in debt interceptor.

Paul Coster – JPMorgan Securities LLC

The business of something I’m sorry sort of on capitulating just called you. The business of selling this company was it disruptive from the perspective of talent retention and attracting engineers or so.

William J Merritt

No, we didn’t actually we didn’t lose anybody.

Paul Coster – JPMorgan Securities LLC

All right sorry. Thank you.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

William J. Merritt

I think it’s, I’d look at it this way, right. So you have your core handset licensing business right, and then you have a licensing business that’s going to occur in adjacent markets, and those adjacent markets can be infrastructure, they could be over the top services, all right, things like that.

The technologies are developing today, for example on network of networks, the inventions will reside on both and to the link. So you’ll have inventions that will be resident on the handset, those inventions will be used to drive that core-licensing program for the company, so things could perpetuate that program.

Other parts of this inventions are on the network side, so they would be used as an example if we were to create a venture for licensing infrastructure. It could be that, the venture then will be the recipient of further technology that we develop on the infrastructure side.

The idea – one of the things when we think about ventures is, we think that you will secure at the highest licensing value in the patent asset that your licensing is a living breathing asset, meaning it’s being managed, it’s been replenished, it’s being backed by R&D, that we think our history has shown that, that’s the more powerful licensing program versus a dead asset, which is here it is, this is all it is, and this is all it’s every going to be.

And so to your point, I think the technology we’re doing today, it maybe diverse, but the actual licensing touch points for that technology may still be infrastructure, terminals and to some extent over the top service.

Paul Coster – JPMorgan Securities LLC

Bill, could you walk us through exactly I mean, what you guys do, I mean I’ve followed you company for sometime, so let me describe the situation, and correct me, if I’m wrong. So you have a bunch of 100, 200 engineers, some of them with PhD, they all come from qualified background, they do all that research, they file for patents, and then you just knock on all these handset makers, saying pay me. So some of them pay you, some of them don’t.

Now let’s say for the guys who pay you, do you actually transfer your technology, you have like a hand off your technology to them, or you just say you’re infringing on my technology, therefore you have to pay me. So could you clarify, I mean exactly, how does the business gets transacted?

William J. Merritt

Sure. That’s – I’ll take your question. You’re right, we have about 200 engineers in-house, probably be 100 offshore doing the development work, approximately 80% of our engineers hold patents. So it’s a very sort of inventive workforce.

I think the part, when you led out to sort of the part that you left out is actually a very important part. And that is, we think about what that generation technology is going to be? We actually build it in terms of actually building, actual systems and as best we can in a given what we’re dealing with.

We then take that result of that research and contribute it to the standards, and that’s where in effect the sale of the technology takes place. And that’s actually where you build the brand, and build the relationship, because the licensing then takes place after you’ve done your successful sale into the standards. And the licensees are very aware of the technology that you contribute. So it’s not a blind or a knock on the door that is unexpected, it’s a knock on the door that’s fully expected, because of the contributions to the company for the standard.

Unidentified Analyst

(Inaudible)

William J. Merritt

It’s a worldwide service BIOS so it’s like 3GPP, which is the worldwide group, which is constituted by SA, and other groups, right. And so there what you’re bringing in is stimulations and here is how it works, here is how it solves this problem in the compression examples you’re actually bringing in code, actually real code and showing how it works. And so that’s a very big part of the process, because it’s not only have you created the solution and created the inventions that grow that solution, but you’ve created great perception that you’re the company that solve the problems.

And so then when you have the licensing, you’ve already contributed the technology and went into the standard, not because the licensing process. And so I tell you that we’re the licensing process, while it can be difficult while companies because you into allowing a lot of money. It’s not over the fact that did we contribute or not. Yes, we did contribute. It’s a question of how much we get for the contribution.

Paul Coster – JPMorgan Securities LLC

Yeah, I guess it’s a follow-up, let’s say I am LG and I saw that you contributed to this standard group, then I say, hey, I’m pretty weak in the compression technology. So IDCC, would you send 50 engineers to my site and teach me for a month, is that how things work or you just tell me, hey go look for whatever I contributed to the standard group and then pay me the money. So how does it work exactly and because I came from R&D background, so I have person and actually hold a few patterns myself.

So a lot of these technology transfer, you have to teach those guys, give them something very tangible, sometimes a lot of the things in the patterns are not easily duplicable. There are lot of trade secretes and in know-hows involved. So in order for people to pay, pay me or pay my formal company, you have to transfer something, something to teach them how to do it. So how does your work or how does your franchise work?

William J. Merritt

All right. So I’d tell you that, the patent licensing predominantly does not require further transfer of technology, because the phones have been manufactured, they work employing InterDigital inventions. Because what happens in the standard, it is what you said, it happens in the standards process, not only that the invention go in, but the whole description of how a particular signal needs to be constructed. It’s all in the standards document. So the information that teaches how to employ invention is there. We do though from time-to-time and it make sense with customers and they want to do that, engaging broader relationships with customers.

So as an example with Nokia, a number of years ago, they wanted someone to develop an entire technology suite for them around TDD, which was one of the competing WCDMA technologies, we did that. A three project with them and successfully developed that technology for them.

So if there is an opportunity to also do technology development with people, we will do that. And we also, and one of the things for example we have in-house today, we have a complete modem design, which we offer to semiconductor companies. But it shows the capability of the company. So we do teach the industry at various points along the way, and they do get a lot of value out of what we’ve done.

Paul Coster – JPMorgan Securities LLC

But I guess, that’s the smaller part of the business right?

William J. Merritt

Yeah.

Paul Coster – JPMorgan Securities LLC

And also you said that your IP can be segmented in two big groups, one is infrastructure, the other one is terminal based IP. What is the value assigned to each group, is that 20:80, or is that 50:50 or…

William J. Merritt

The value of the company today, let’s say it’s principally terminal use, because that’s actually the licensing that we’ve done. So I would say, very small values of scrap, it’s described to infrastructure portfolio today at the company. That said, it is a very valuable portfolio we have. We just haven’t exploited it. And it’s a fairly sizable portfolio, as well it’s probably 2,000 plus patent assets in terms of infrastructure patents that’s a fairly large portfolio.

Paul Coster – JPMorgan

So, during your last call you referenced cash flow breakeven for the year. And I just wanted to make sure I was looking at it apples-to-apples what would be the Q1 number that links to that for the full year, is it free cash flow, is it net cash from operations, how is that – how this deferred revenue impact that?

William J. Merritt

I think it’s all the way, the define free cash flow, and we have a definition of that, which we typically include in our wire of releases and that’s what we’d be looking at in terms of when we say, we’re going to be cash flow positive, it’s a bad definition free cash flow.

Paul Coster – JPMorgan

Okay, I’ll have a look at it, does that exclude the impact of deferred revenue?

William J. Merritt

Yes.

Paul Coster – JPMorgan

Yes, okay. And then one last one, so you just announce the another share repurchase, so can you kind of talk about, I guess it stands for reason that you see that as a more attractive value proposition and acquisition of new patent assets, but can you kind of talk about how you think for that decision, mutually exclusive or ongoing.

William J. Merritt

Yeah, I wouldn’t say that mutually exclusive, I think that one, the board is obviously very bullish about the company’s future, we have completed, we had a $100 million authorization, which we completed, put another $100 million that’s on top of $500 million or $600 million, we had already repurchase the stock. Also though it’s not a question of preference for a vehicle, it’s a question of what it will deliver the highest value pack (inaudible), hence whether that’s a stock buyback, whether it’s an acquisition of patent assets, whether it’s investment back at the business, or whether it’s payment of the dividend.

There is no preferred vehicle by the board. What we end up doing is a mix, which is not surprising it’s the portfolio approaches having deployed our capital and so we have a dividend, we have we’ve dome patent purchases and we our bought back stock. We’ve done some patent purchases, and we continue to invest back in the business in a mix that we think in combination delivers the highest value back to the shareholders.

Paul Coster – JPMorgan Securities LLC

Can I ask one quick question? You have $600 million in cash proceeds, you’re right, and why did you and clearly you’ve got, when it comes to buy back why did you do a convert to a year ago or so $200 million?

William J. Merritt

That was just about a little over a year ago. A couple of reasons, one was, we were in the process of fairly some larger patent acquisition opportunities. It felt like raising capital was the best way to position ourselves for those opportunities. And the markets were very favorable back then, and so it made sense for us to raise capital, and give us that operational flexibility.

Second, and I’d say that’s probably 80% of the reason, but 20% of the reason, we hadn’t been in the capital markets in a number of years. There is some benefit to actually tapping capital markets. Again, if you need cash, it’s sometimes good to do it, and therefore gain some benefits from having been in the market.

It turns out that, having the cash on board has continued to be a good strategic asset for us, because we continue to be well positioned for some acquisition opportunities that make sense. We have the operational flexibility to do buybacks as we’ve seen. So I think all-in, it actually was a really smart move by the company and have done that.

Paul Coster – JPMorgan Securities LLC

Bill, you mentioned a few things. The deals you sign were kind of postponed while the company was up for sale. Then you said, many companies came through looking at the portfolio, liked facets of it very much, but didn’t want to buy the whole thing. It was a third thing, but I can’t – but anyway, shouldn’t we be seeing more of an acceleration of small and big deals now? There was a bit of a time out for about 6 or 9 months. You’ve got a variety of new products, you’ve got a LTE coming on, you’re willing to sell some portions, shouldn’t there be a pretty steady group of announcements here shortly or is this kind of I think take a year or so?

William J. Merritt

Well, I think we moved – have moved pretty quickly in terms of I think its five deals that have been signed since we exited the process, because you’re right. During the process, we basically put everything on hold, strategically that made them a sense. The pipeline for deals is very strong. At the moment we have deals of variety of sizes and we always talk about three different phases of deals or technical evaluation and economic discussions, and we’ve address and deals in all phases of the business right now.

We certainly are in a good position that deliver more deals during the year. Some of those deals, we would hope to be bigger than deals that we’ve done to-date. Personally, I’d like to get those deals in sooner rather than later. So we are using patent sales and carrying some of those deals that push them along. Licensing is the process and game of moment and you do want to see steady deal flow as best you can.

That said, the most important thing about our deals is not the timing of the deal, but the value of the deal, because the value of the business moves greatly on moving the royalty rate up and at 10%, 12%, it doesn’t move a lot of moving deals in and out by 12 months. So we’re pushing the patent guys pretty hard and certainly I would like to see larger deals coming sooner if we can get on them back.

Paul Coster – JPMorgan Securities LLC

It’s fair to say your pipeline is as big it’s ever been or would you not characterize with that?

William J. Merritt

I would say it’s big as it’s ever been in part because of the – I’d say the strength of the portfolio, the strength of the licensing teams and their breath. They’re able to do more than they’ve done before. It’s a pretty active pipeline that they have.

Paul Coster – JPMorgan Securities LLC

Revenues at the moment are not growing and as because you have tied to unit volumes amongst your customers and unfortunately you got a couple of customers that have been losing market share recently, and when do you expect to return to growth, patent sales aside core royalty business?

William J. Merritt

Yeah, I think there is two things affecting the revenue line right, one is what you mention is that there is a shift from some of our per unit licensees over to some of our fixed price in particular Apple and Samsung and that really has occurred in two places, RIM and obviously HTC, which were very strong licensees for us, have just not done well over the last few quarters, and we’ve seen that impact and they’ve not done well at the expense or in favor of Apple and Samsung doing very well. And we’ve also seen similar impact in Japan, with the introduction of the iPhone in Japan and how that affected the Japanese sales.

So it’s hard to say, with HTC and RIM, do their fortunes turnaround because that’s obviously one thing that would shift the revenue picture for us. Second, and probably more important for us is adding new deals, right and so and I think the best opportunity in terms of being a sort of the best defined opportunity, but at least outside world can see it. The four companies that are on litigation in the fall, and the opportunity to settle within ahead of that period of time or as a result of the litigation settle thereafter as we talked about each one of those is a major revenue contributor. So I think with success in the litigation and the other thing that will happen at the end of this year is Samsung is up for renewal, it give us an opportunity to re-price that, so I think all those things if done correctly and we’ve got a good history of doing right way. We’ll get us back on a growing revenue trend.

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Source: InterDigital's CEO Presents at 40th Annual J.P. Morgan Global Technology, Media and Telecom Conference (Transcript)
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